Behavioral Economics and Mergers

Posted by D. Daniel Sokol

Maurice Stucke of DOJ/Antitrust has a new article on the use of behavioral economics and mergers entitled Behavioral Economists at the Gate: Antitrust in the 21st Century.

Abstract: Although tossed against the rocks elsewhere, the Law and Economics' rational choice theories, within the quiet waters of antitrust, stand largely unchallenged. Antitrust's economic theories, premised on “rational” profit maximizing behavior, enjoy the deep slumber of a decided opinion. Although Post-Chicago School antitrust theories have developed, the Chicago School's rational choice theories still dominate. This article explores some possible paradoxes and anomalies with respect to antitrust's merger theories. It appears anecdotally that some corporate behavior is (or is not) occurring which is not readily explainable under the Chicago School's theories. It is an empirical question as to the degree the federal antitrust agencies, relying upon their Horizontal Merger Guidelines, are indeed accurately forecasting the likely competitive effects of mergers today. This article concludes with recommendations for specific legislation to improve the current state of antitrust policy.

Today, the federal agencies devote considerable resources investigating ex ante the merger. But the agencies examine only half the picture, namely the state of competition in the few years leading up to the merger. Now it is time for the agencies to systematically review what actually happens post-merger. Close-call mergers would be revisited to determine if the agencies got it right. Empirically testing these Chicago School theories may reduce the likelihood of false negatives and positives in merger review, lead to more effective antitrust enforcement, increase transparency of the merger review process, make the agencies and their officials more accountable for their decisions, and perhaps temper the claims of partisanship in antitrust enforcement, which have increased over the past quarter century.