Behavioral Economics and Competition Policy
London, England
22 April 2010
Hosted By: the Office of Fair Trading
NERA Director Dr. Mark Williams was a discussant at an evening economics seminar organized by the UK Office of Fair Trading (OFT). Together with Simon Priddis of Freshfields Bruckhaus Deringer, he discussed two papers on behavioral economics and competition policy, presented by Amelia Fletcher, Chief Economist and Senior Director of Mergers at the OFT, and Professor Mark Armstrong of University College London (UCL).
Grounded in the work of Marshall, Edgeworth, and Hicks, neo-classical economics assumes that all firms and consumers are well-informed, rational agents who maximize profit or utility, subject to given constraints. This paradigm forms the backbone of modern economics and is capable of explaining a rich variety of market phenomena.
But customers and consumers, as well as firms and managers, are not always -- or even often -- rational and well-informed, and in such circumstances neo-classical principles may provide incorrect predictions. Behavioral economics seeks to incorporate insights about how "real people really act" into economic analysis. Antitrust policy makers in turn need to consider how behavioral economics affects how we analyze markets and competition.
While behavioral economics has been popularized by writers such as Ariely ("Predictably Irrational"), or Thaler and Sunstein ("Nudge"), it relies on a substantial body of academic research, e.g., on time-inconsistent preferences and hyperbolic discounting, endowment effects, fairness in bargaining games, and bounded rationality.
The antitrust and competition policy implications of behavioralism are not yet well established. At this OFT evening economics seminar, Amelia Fletcher presented her research (joint with Matthew Bennett, Elizabeth Hurly, John Fingleton, and David Ruck) on how behavioral economics affects competition policy. Professor Mark Armstrong discussed his work (joint with Steffen Huck) on behavioral economics as applied to firms.
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