Behavioral Antitrust and Merger Control

1. SITE Annual Meeting 10 June, 2010 Budapest, Hungary Behavioral Antitrust and Merger Control Professor Luke Froeb Owen Graduate School of Management Vanderbilt University

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

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}

4. Dashboard of Player B

5. Dashboard of Player B (cont.)

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

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

8. Extrapolating from the Laboratory to Impersonal Market Settings Vernon Smith has observed that: [H]umansubjects 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.

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