1. Behavioral Antitrust and Merger Control
SITE Annual Meeting
10 June, 2010
Budapest, Hungary
Behavioral Antitrust and Merger Control
Professor Luke Froeb
Owen Graduate School of Management
Vanderbilt University
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2. How to Analyze a Merger When Firms Compete by Bargaining
Theory
Multilateral bargaining has multiple cooperative and non-cooperative solutions
In many of them, the division of the surplus depends on the concavity of the surplus function
Traditional Application of Theory
Look for evidence of concavity
Look for evidence that firms act strategically
Alternative to Reliance on Theory …
Run a laboratory experiment
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3. Three Player Experiments
Conducted at Vanderbilt’s “eLab”
Participants quizzed to make sure they understood the rules, then “tripled” up
Structure: Player B bargains with N and X.
Concavity: First agreement is worth $20; second is worth only $10
Theory: The least core, pre-nucleolus, and pre-kernel all predict surplus splits of {$20, $5, $5} for {B, N, X}
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4. Dashboard of Player B
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5. Dashboard of Player B (cont.)
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6. What Happened?
Most triplets used the “chat” box to argue for a “fair” split of the total surplus
Player B went so far as to “give” Player N or X more surplus than was generated by second agreement
A small minority of B players acted strategically
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7. Extrapolating from the Laboratory to Large Business Organizations
Firms do not randomly select individuals to make important decisions
Organizations design mechanisms to correct biases they cannot screen for
Firms make decisions within specific industry contexts (codes, committees, cultures)
Firms adopt heuristics that work well in the contexts for which they are developed
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8. Extrapolating from the Laboratory to Impersonal Market Settings
Vernon Smith has observed that:
[H]uman subjects in the laboratory frequently violate the canons of rational choice when tested as isolated individuals, but in the social context of exchange institutions serve up decisions that are consistent (as though by magic) with predictive models based on individual rationality.
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9. Policy Dichotomy: Consumers vs. Firms and Markets
Predictable consumer irrationality can be incorporated into demand models
e.g., hyperbolic discounting
Departing from the assumption of profit maximization is not (yet?) warranted
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