Competition Law and the Bounded Rationality of Firms

Firm rationality plays a role in several aspects of competition law. Yet, the conception of the firm as a rational, profit maximizing entity has been disputed in different disciplines. This literature shows that neoclassical economic assumptions on which competition law is based can fall short of explaining the full range of observed firm behaviour. Accordingly, an alternative conception of the firm as boundedly rational can impact the understanding of firm conduct in competition law. Behavioural literature describes two different sources of bounded rationality in firms. Firstly, behavioural biases of managers, such as overconfidence bias can affect decision-making in a firm. Secondly, firms are constrained by their decision-making processes, which can cause departures from rationality. This work examines the application of behavioural insights to two aspects of competition law - predatory pricing and mergers. It uses the case study method to individually examine firm behaviour in these situations. This thesis finds that, if firms are taken to be boundedly rational, intention can be relevant to predatory pricing because firms may cut prices with the intention of eliminating competitors even when there is little or no chance of recouping through higher prices. This is in contrast to the understanding of predatory pricing in US law, where recoupment is essential. Intent requires understanding how business decisions are taken and thus, provides an opening for behavioural insights to be introduced into predatory pricing law. Merger analysis is particularly suited to behavioural insights as mergers are often either a result of managerial biases or a product of strategic considerations such as a response to entry by competitors. This thesis finds that insights from management studies could be useful to understanding possible anticompetitive motives behind mergers, particularly when these decisions are taken to eliminate close or potential competitors.