Consumer Behavioural Biases in Competition: A Survey

Abstract

This report was commissioned by the Office of Fair Trading (OFT) from London Economics in association with Steffen Huck and Jidong Zhou (University College London). It examines the implications of consumer behavioural biases for firms' decisions and hence for competitive equilibria. Consumer behavioural biases imply that consumers may not behave in the fully rational way that many economic models presume. What impact do these biases have on competition? Specifically, how does competition and pricing change when consumers are biased? Can inefficiencies that arise from consumer behavioural biases be mitigated by lowering barriers to entry? Do biased consumers make rational ones better or worse off? And will biased consumer behaviour be overcome through learning or education? This report reviews the empirical and theoretical behavioural economic literature to answer these questions. It looks at the key implications for consumer and competition policy in particular to understand how and when competitive equilibrium may change for the worse. It also contributes to our understanding of when, why, and how we should intervene. The views of this paper are those of authors and do not necessarily reflect the views of the OFT nor the legal position under existing competition or consumer law which the OFT applies in exercise of its enforcement functions. Rather the aim of the report is to shed some evidence on this interesting issue, and promote economic debate in this area. This report is part of the OFT's Economic Discussion Paper series. If you would like to comment on the paper, please write to me, Amelia Fletcher, at the address below. The OFT welcomes suggestions for future research topics on all aspects of UK competition and consumer policy.