Behavioral Economics and Antitrust at AAI

Josh Wright —  29 June 2008

Related to Thom’s post on behavioral economics and the problem of conflicting or offsetting biases, the American Antitrust Institute (AAI) held a conference on June 18th 2008 (audio available at the link above). The conference was, as I understand it, designed as a precursor to the AAI’s release of a “Transition Report” to the next administration, offering its own view of antitrust enforcement agenda. The conference kicked off with a keynote from Donald Langevoort (Georgetown), filling in for Cass Sunstein, on behavioral economics and its potential role in antitrust followed by a panel discussion. After listening and reading Thom’s post, and informed by some of the work that I’ve done comparing the empirical predictions of “traditional” microeconomic theory with behavioral economics in consumer contracting markets and finding that the former outperforms the latter, I had a few reactions to what I heard from the keynote and panelists.

The first was that I was surprised at how willing the panelists were to take the various behavioral and experimental insights as “given” for the purposes of antitrust analysis in light of influential papers calling into question their robustness, e.g. Zeiler and Plott I or Zeiler and Plott II with respect to the “endowment effect.” In fact, the keynote began with a long discussion of the endowment effect which asserted that the findings were robust and well established. The tone of panel as a whole was that the results were generally assumed to be verified, robust, and “ready for primetime” in terms of translation into policies. Papers challenging the existence or robustness of these results or outlining their limitations (e.g. learning, specialization, competition) were not mentioned (if they were I missed it).

The second was that I didn’t hear anything about what Thom calls the “conflicting quirks” problem. Of course, as Dan Ariely notes in his comment to Thom’s post, behavioral economics is a young science and many of these issues remain to be worked out. My point is not that they will not be or cannot be. That remains to be seen. Rather, I’m saying that the appropriate point to raise these issues seems to be before we regulate or alter the research agenda based on the existing literature.

Third, there was little discussion about how an antitrust agenda informed by behavioral economics would deal with the problem of behaviorally biased regulators making systematic errors. I did appreciate hearing some discussion of the problem of extrapolating laboratory results to firms, though this strikes me as a much larger problem than the discussion suggested. All in all, it was an interesting panel discussion and keynote and definitely worth a listen.  But I’d like to see a more rigorous theory of incorporating behavioral economics into antitrust, and particularly a theory that addresses some of the objections discussed above, before one takes seriously the notion of altering competition policy to make room for these experimental results.