Much modern policy making is based on the assumption that it is generally a good thing if firms or schools or hospitals compete hard with each other. It encourages them to be efficient and innovative, and to meet the needs of their customers, students or patients. But is competition really such a great thing?
The truth is that competition (like democracy) is far from perfect, but it is the least bad of all the alternatives that have been tried. Put another way, the good thing about competition is that it isn't monopoly! Why is this? The key attribute of a monopoly is that it confers freedom from challenge. This makes life comfortable for owners, managers and staff. But it weakens performance incentives and allows them to stick to routines which ought to be abandoned.
But competition, or 'market forces', or 'let the devil take the hindmost' cannot be the whole story. Humans are social animals and there are altruistic elements in all of us. No economist or businessperson or politician should want or expect humans to be purely profit driven. Indeed, Adam Smith himself, in the opening words of his Theory of Moral Sentiments pointed out that:
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. Of this kind is pity or compassion, the emotion we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.
The modern version of the above sentiment is the province of behavioural economists, but they are essentially repeating what has been obvious to their colleagues since economics was invented. It is very clear that many consumers do not act solely so as to maximise their own narrowly defined economic self-interest. They often care about fairness, and can be altruistic. They sometimes buy less of certain goods (such as perfumes) if they appear too 'cheap'. Their real world choices also depend on the way in which options are presented to them, and they vary greatly in the way in which they value the short term over the long term, and their response to various risks, including financial risks. All these truths do not invalidate the economic methods used by competition authorities, which are firmly based on real world theories of harm and observations of real, not idealised, consumer behaviour.
Competition authorities accordingly deal with how consumers really behave, not as some theory says they should behave. They spend a lot of time, for instance, finding out how prices for different products are linked. If they were to find - for example - that demand for red cars did not change when demand for blue cars fell then that would be a bit surprising, but it would be accepted. They would not seek to argue that the two products should be substitutes just because rational consumers should not care that much about the colour.
It is certainly true that competition authorities will generally assume that firms will act 'rationally' and will in particular seek to maximise profits. But this is (in the absence of strong evidence to the contrary) a perfectly plausible assumption, not least because of managers' fiduciary duty to prioritise the financial interests of shareholders. It is also a prudent assumption. It would hardly be sensible to approve a worrying merger simply because the owners of the newly merged entity declare that they do not intend to maximise its profits. And it should not be forgotten that altruistic owners may be succeeded by those with a stronger interest in profits.
Competition authorities also recognise the dynamic nature of firms' interaction with each other and with their customers, and will if necessary apply techniques such as game theory. Equally, authorities will if necessary allow an anti-competitive merger if there are offsetting benefits to customers such as greater innovation or lower prices arising out of the behaviour or greater efficiency of the merged entity.
FIPRA's Phil Evans delivered an entertaining speech about behavioural economics at the 2010 Vienna Competition Conference, and noted that "... [competition] authorities have, in the great tradition of all economics, adopted elements of behavioural economics without really realising that they were doing precisely that! In many ways we are all behavioural economists now! ... When we, as authorities and competition advocates, start to ask questions about how consumers behave, why they respond to certain stimuli in the way they do and how we can tailor our decisions and investigation processes best to reflect this learning we are forced to realise that our existing tools are inadequate. Bit by bit, and decision by decision we are adopting elements of behavioural economics almost by stealth. Indeed it is difficult now to read a credible competition assessment that does not recognise the complicated nature of consumer decision making and the need to ensure that remedies are able to reflect this complexity."
The more evangelical behavioural economists claim that the work of other economists is too abstract and based on unrealistic assumptions, particularly about the 'rationality' of companies and consumers, the variation in firms' efficiency, the way they interact and so on. This may be true in the case of some academic research, but it is certainly not a fair criticism of modern competition authorities.
Competition authorities do in particular recognise that information remedies need to be designed with real world consumers in mind - and that this is easier said than done.