Justifying Antitrust: Prediction, Efficiency, and Welfare

Posted by Social Science Research Network

Justifying Antitrust: Prediction, Efficiency, and Welfare

Avishalom Tor (University of Haifa)

Abstract:     Scholars and enforcement officials debate the merits and implications of “behavioral antitrust” — the application of empirical evidence showing how human behavior departs systematically and predictably from strict rationality (“bounded rationality”) to antitrust law. Notwithstanding their many disagreements, both sides in this debate recognize that consumers — as opposed to business firms and their managers — are boundedly rational. This article shows, however, that the bounded rationality of consumers poses for antitrust law three distinct, if related, challenges, only the first and most obvious of which has received substantial scholarly attention and analysis to date. The first challenge is the prediction challenge — that is, the concern that antitrust rules and practices that assume consumer rationality mistakenly may condone anticompetitive behavior or prohibit procompetitive business practices because they misinterpret or mispredict the behavior of boundedly rational consumers or the reactions of firms to such behavior. Second and more fundamental is the efficiency challenge, which surfaces where consumer bias weakens the causal link between competition and efficiency. For instance, consumers who systematically overestimate the value of a given product or service will manifest excessive demand for it, generating inefficiencies in both allocation and production. The third, least noted but most troubling of all, is the welfare challenge. Behavioral and consumer research both show that consumer choice is often constructed ad-hoc during the process of choice and shaped by context-specific influences. Yet if consumer choice and the resulting aggregate demand do not reflect consumers’ authentic, preexisting preferences — and thus do not maximize individual and aggregate welfare — is there an economic justification for antitrust law? The Article examines these three challenges closely, finding that current doctrine and policy can accommodate the prediction challenge with some modifications. Most importantly, a substantially more modest version of the standard economic justification for antitrust law largely weathers the thorny efficiency and welfare challenges alike.