The Fable of Entry: Bounded Rationality, Market Discipline, and Legal Policy
87 Pages Posted: 22 Dec 2006 Last revised: 11 Jan 2009
Legal scholars have recently advanced a behavioral approach to the law and economics school of thought, replacing the traditionally assumed rational actor with an empirically based ¿boundedly rational¿ decision maker. In response, advocates of traditional law and economics have asserted that boundedly rational behavior is of little significance for the analysis of economic activities in market environments, most notably because competitive pressures will eliminate such behavior. This article argues, however, that bounded rationality has important effects on the market even under conditions of intense competition. Through a study of the competition among new entrants into industry, this analysis examines the limited efficacy of competition in weeding out boundedly rational behavior. In the process, the article highlights the unique contribution and surprising conclusions of a behaviorally informed approach to the economic understanding and legal regulation of the competition among new entrants. This analysis also has important implications for antitrust law more generally. The article suggests that the role assigned to entry barriers in determinations of market power should be modified, and reevaluates legal doctrine in the areas of predatory pricing and horizontal mergers. Thereafter, it highlights the profound impact of bounded rationality on market behavior and market outcomes outside the domain of antitrust law. The article concludes by discussing the nature of and providing specific examples for the unique contribution a psychologically informed approach to legal scholarship stands to make to the analysis of market and non-market behaviors alike.
Keywords: Entry, Competition, Bounded Rationality, Behavioral Law and Economics
JEL Classification: K00, K21, L41
Suggested Citation: Suggested Citation