Behavioral economics, consumer protection, and antitrust

Competition Policy International

Volumn 6, Issue 1, 2010, Pages 65-86

  Salinger, Michael A ^a  

^a BOSTON UNIVERSITY   (United States)

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EID: 77951571303     PISSN: 15540189     EISSN: 15546853     Source Type: Journal    
DOI: None     Document Type: Article

References (52)

1. The field of behavioral economics is quite vast and a complete survey of the literature is far beyond the scope of this article. For those seeking a more extensive review, see C. Camerer, S. Issacharoff, G. Loewenstein, T. O'Donoghue, & M. Rabin, Regulation for Conservatives: Behavioral Economics and the Case for "Asymmetric Paternalism," 151 U. PA. L. REV. 1211 (2003);
2. P. Diamond & H Vartiainen (eds.) BEHAVIORAL ECONOMICS AND ITS APPLICATIONS (2007);
3. and R. Thaler & C. Sunstein, NUDGE: IMPROVING DECISIONS ABOUT HEALTH,WEALTH, AND HAPPINESS (2008). In the Diamond & Vartiainen volume, the chapter by Bernheim & Rangel provides a clear and succinct summary of ways in which individual behavior has been documented to deviate from rationality and the issues in how to incorporate such behavioral factors into economic models.
4. See B.D. Bernheim & A. Rangel, Behavioral Public Economics: Welfare and Policy Analysis with Nonstandard Decision-Makers, BEHAVIORAL ECONOMICS AND ITS APPLICATIONS (P. Diamond & H Vartiainen eds.) (2007).
5. The classic statement of this position is M. FRIEDMAN, ESSAYS IN POSITIVE ECONOMICS (1953).
6. Predictive accuracy was one of the justifications Cyert & March gave for their behavioral theory of a firm. See R.M. CYERT & J.G. MARCH, A BEHAVIORAL THEORY OF THE FIRM (1963).
7. See, H. SIMON, MODELS OF MAN (1957), VOLS. 1.
8. H. SIMON, MODELS OF BOUNDED RATIONALITY, 2 (1982).
9. The observation that the behavior is technically consistent with revealed preference and a strong taste for looking to the left is due to Bernheim & Rangel. See B.D. Bernheim & A. Rangel, supra note 1. Thaler & Sunstein also discuss the London pedestrian example. See R. THALER & C. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH,WEALTH, AND HAPPINESS 90 (2008).
10. Governments are still needed to provide public goods like defense and they can have a role in correcting externalities that arise when a transaction between two parties affects others that are not party to the transaction. The efficiency of market outcomes does not necessarily imply a distribution of income that society would consider ideal or even satisfactory, so there might be a role for government in redistributing income.
11. G.J. Stigler, The Economics of Information, 69, J. POL. ECON. 213 (1961).
12. G.R. Butters, Equilibrium Distribution of Sales and Advertising Prices 44 REV. ECON. STUD. 465 (1977).
13. P. Diamond & H. Vartiainen, Introduction, P. Diamond & H. Vartiainen (eds.) supra note 1 at 2.
14. For a more complete elaboration of deviations from rationality, see Thaler & Sunstein, supra note 1
15. Bernheim & Rangel, supra note 5
16. M. Allais, Le comportement de l'homme rationnel devant le risque: critique des postulats et axiomes de l'école Américaine, 21 ECONOMETRICA 503 (1953).
17. Although the probabilities do not match up exactly, suppose that the choice is made at the start of the Major League Baseball season in United States and Canada. Think of the 10 percent occurrence as the New York Yankees winning the World Series, the 1 percent chance being the Cincinnati Reds winning the World Series, and the 89 percent chance being any team besides the Yankees or Reds winning the World Series. In the first choice, the individual either takes $1 million for sure or, alternatively, $5 million if the Yankees win, $0 if the Reds win, and $1 million otherwise. The choice is between getting $1 million if either the Yankees or Reds win the World Series as opposed to $5 million if just the Yankees win. For both choices, the individual's decision only matters if the Reds or Yankees win. The amount one gets if someone other than the Yankees or Reds wins does not rationally affect this choice.
18. When behavioral economists say that "framing" affects decisions, they mean that people make different choices when the same information is presented in different ways.
19. Tversky died in 1996. Nobel Prizes are not awarded posthumously.
20. D. Kahneman & H. Tversky, Judgment under Uncertainty: Heuristics and Biases, 185 (New Series) SCIENCE 1124 (1974).
21. For example, they gave respondents a description of a person with characteristics that matched the stereotype of a librarian and asked for the relative probabilities that the person was farmer, physician, salesman, airline pilot, or librarian. Research has shown that on average, respondents give too little weight to the fact that some professions are far more common than others.
22. Thaler & Sunstein, supra note 1, at 23.
23. Id at 97.
24. Status quo bias can be understood as a way in which framing matters.
25. D. Laibson, Golden Eggs and Hyperbolic Discounting, 112 Q. J. ECON. 861 (1997).
26. W. Güth, R. Schmittberger, & B. Schwarze, An Experimental Analysis of Ultimatum Bargaining, 3 J. ECON. BEHAV. & ORG. 367 (1982).
27. The insight that humans sometimes give in to short-run temptation with disproportionately severe long-term consequences dates back at least to the story of the Garden of Eden. Restricting attention to people considered to be economists, consider the following quote: "The man who acts according to the rules of perfect prudence, of strict justice, and of proper benevolence, may be said to be perfectly virtuous. But the most perfect knowledge of these rules will not alone enable him to act in this manner: his own passions are very apt to mislead him; sometimes to drive him and sometimes to seduce him to violate all the rules which he himself, in all his sober and cool hours, approves of." See A. SMITH, THE THEORY OF MORAL SENTIMENTS (1976). (The reference is to a Clarendon Press edition. The book was originally published in 1759.)
28. The equity premium puzzle is that the average return to equities so far exceeded the return to bonds that it was hard to reconcile investors' willingness to hold bonds with plausible degrees of risk aversion. See R. Mehra & E.C. Prescott, The Equity Premium Puzzle, 15 J. MONETARY ECON. 145 (1985). (With the S&P 500 now roughly 20 percent below its value a decade ago, the puzzle may not be as pronounced as it once was.)
29. See, for example, R.J. Schiller, Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends, 71 AM. ECON. REV. 421 (1981)
30. S.F. LeRoy & R.D. Porter, The Present Value Relations: Tests Based on Implied Variance Bounds, 49 ECONOMETRICA 551 (1981).
31. See comments of P. Diamond in P. Diamond & H.Vartiainen (eds.), supra note 1, at 303.
32. J.B. DeLong, A. Schleifer, L. Summers, & R.J.Waldmann, Noise Trader Risk in Financial Markets, 98 J. OF POL. ECON. 703 (1990).
33. S. Salop & J. Stiglitz, Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion, 44 REV. ECON. STUD. 493 (1977).
34. X. Gabaix & D. Laibson, Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets, 121 Q. J. ECON. 505 (2006).
35. The customers who end up paying the late fuel charges may not literally be uninformed. The group would include those with strong preferences not to refuel and little concern for the cost and those who, due to the unfolding of travel-day events, end up not having the time to refuel.
36. Sometimes they do. As is discussed below, Southwest Airlines advertises its competitors' shrouded charges.
37. The FTC as National Nanny, THE WASH. POST, March 1, 1978.
38. J.H. Beales, III, The Federal Trade Commission's Use of Unfairness Authority: Its Rise, Fall, and Resurrection, 22 J. PUB. POL. AND MKTG 192, (2003).
39. Camerer et al., supra note 1.
40. Camerer et al. define a successful asymmetrically paternalistic policy as one for which: (p*B) - (1 - p) C - I + Δπ > 0, where p is the fraction of boundedly rational individuals, (1 - p) is the fraction of fully rational individuals, B is the benefit of the policy to the boundedly rational individuals, C is the cost to the fully rational consumers, I is the implementation costs, and π is the economic profits of companies supplying the market in question.
41. Cameron et al. consider disclosure requirements more intrusive than defaults because they might be more costly.
42. Thaler & Sunstein, supra note 1.
43. In 2007, the Bureau of Economics at the FTC held a conference on the application of behavioral economics to consumer protection regulation, available at http://www.ftc.gov/be/consumerbehavior/ index.shtml.
44. For a summary of the conference, see JOSEPH P. MULHOLLAND, SUMMARY REPORT ON THE FTC BEHAVIORAL ECONOMICS CONFERENCE, available at http://www.ftc.gov/be/ consumerbehavior/docs/ 070914mulhollandrpt.pdf.
45. An important part of the explanation is that many of the FTC consumer protection actions entail fraudulent activities by "judgment-proof" parties. Liability is not a close call requiring a careful weighing of costs and benefits, and penalties are driven more by the financial resources of defendants than by a measure of economic damages.
46. Christine Jolls, Behavioral Law and Economics, Diamond and Varitainen (eds), supra note 1 at 115.
47. As noted above, the need for consumer protection may lie more in some consumers making some very bad decisions than in ways in which consumer decisions are wrong (but only slightly so) on average.
48. It is interesting to consider why there has been little interest in behavioral economics approaches in industrial economics. A possible explanation is that one of the factors that drives interest in behavioral approaches is anomalies that seem hard to explain with a model of rational behavior.With the decline in interest in cross-market empirical analysis in industrial economics, industrial economists have not done the sort of work that might be expected to yield anomalies. Anomalies may exist, however. For example, continued investment in the airline industry despite a history of massive losses should arguably be considered a major anomaly in the industrial economics literature.
49. R. Roll, The Hubris Hypothesis of Corporate Takeovers, 59 J. BUS. 197 (1986).
50. See, for example, A. Berle & G. Means, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932)
51. W.J. BAUMOL, BUSINESS BEHAVIOR, VALUE, AND GROWTH (1959).
52. I do not mean to suggest that there are no implications. I am not aware of any analysis of them, however, and they are not transparent without analysis.