Justifying Competition Law in the Face of Consumers’ Bounded Rationality

Abstract

The central economic justification for competition law is that the protection of competition promotes welfare. In particular, perfect competition among firms catering to consumer demand for goods and services maximizes social welfare by generating both allocative and productive efficiencies. This standard account rests inter alia, however, on the assumption that consumer demand reveals rational consumer beliefs and preferences. Hence, an otherwise competitive market that caters to “erroneous” demand based on consumers’ mistaken beliefs or constructed, ad-hoc preferences will fail to maximize efficiency and welfare. Yet, empirical behavioural findings show that boundedly rational consumers exhibit mistaken beliefs and constructed preferencesConstructed preferences regarding some of the products and services they demand in the market. These behavioural findings, therefore, challenge the conventional economic justification for the important role served by competition law and its institutions as the means for protecting competition in the market. After explaining the challenges that the behavioural evidence poses for the standard economic account, this chapter outlines two key elements of the behavioural economic case that suggest competition law still has an important role to play in advancing efficiency and welfare even after the bounded rationalityBounded rationality of consumers is accounted for, albeit perhaps a more modest role than competition law discourse usually ascribes to it.