What Does Behavioral Economics Mean for Competition Policy?

This paper looks at whether behavioral economics fundamentally changes our understanding of competition policy. We argue that behavioral economics is an important incremental advance in our understanding, just as informational economics was before it. But this does not mean that all previous economic models of competition and markets are now irrelevant. For the most part, they still provide valid and valuable insights. Importantly, behavioral economics does not question our belief in competition policy as a tool for making markets work well for consumers.

Nevertheless, the existence of behavioral biases does have a number of implications for the way in which markets work. Behavioral biases on the consumer side emphasize the importance of the demand side in making markets work well, and the important synergies between consumer policy and competition policy. Behavioral biases may also have implications for anticompetitive behavior. In spite of this, behavioral economics does not necessarily imply more intervention. Markets can often solve their own problems and even where they can’t, there are dangers inherent in over-paternalism limiting consumer choice. Behavioral economics also emphasizes the difficulties that authorities can have in trying to correct for such biases.