Behavioural economics: the lessons for regulators

Abstract:

Economists have long understood that consumers frequently depart from the ideal of perfect rationality, but we have only relatively recently appreciated that these departures are largely predictable and so provide opportunities for firms to exploit consumers. The flip side to this is that there are also opportunities for competition authorities and regulators to intervene in ways that significantly benefit consumers. In this paper, we first describe a number of consumer biases that are relevant to competition policy. We then provide five “threshold questions” that regulators or competition authorities need to answer before they can intervene on behavioural grounds. These are designed to avoid unnecessary or poorly thought out interventions. We then provide four lessons that regulators and competition authorities need to learn in a behavioural world. These are designed to maximize the probability of proposed remedies solving the competition concern identified.