Standard economic thinking does not capture consumer behavior quite well

The understanding of complex social problems requires interdisciplinary approaches. In a Project Syndicate article, Ricardo Hausmann describes recent research on how moral psychology can improve current economic models of consumer behavior. This branch of psychology can give better insights on how to predict our economic choices, since we carry out transactions not only with the aim of maximizing our utility but also driven by social norms that are specific to the groups to which we belong or want to belong.[1]

For example, our aspirations and those of our peers may cause our demand to be significantly inelastic to price, which has an important implication for antitrust analysis. Different groups that share common values may constitute different relevant markets. If authorities are able to identify such groups, the information would be useful to know where to look for different price elasticities. This could expand current criteria used to segment relevat markets. Relevant market segmentation is of course a common concept, but the innovative insight would be to look for social norms that determine purchasing behavior across different customer groups.

This line of thinking might also lead us to better understand the potential of a new entrant that offers a product with great social identity appeal (e.g., electric cars). A good reason to buy a Tesla instead of a diesel engine luxury car may not only be our genuine concern for the environment but also our desire to be seen as progressive. In the same way, small shops may be able to survive the onslaught of giants and their economies of scale because a significant group of people may not want to be seen in a Walmart but rather at a local farmers market. Some people may use Uber not only because it is cheaper and convenient but also because they want to be seen as supporters of innovation and technological progress.

In addition, other consumer behavior theories can help us understand advertising within antitrust cases in a different way. If, contrary to standard economic theory, we do not assume stable preferences, advertising can also be regarded as a powerful force that can sway consumer spending (a Don Draper-approved statement) toward a given firm’s output. The effect would not only be due to awareness of a product and its characteristics but because the advertising campaign may be successful in making consumers perceive a brand as compatible with the group that they want to be a part of.

In sum, consumers make decisions not only based on relative prices and qualities but also on who they are and who they want or not want to be. If we want to assess market conditions within antitrust cases more accurately, we should start taking all of this into consideration.

[1] Hausmann describes this as a quiet revolution, but such theories of consumer behavior have been around for a long time. For a brief review, see Swan, Peter (2009). The Economics of Innovation (pp. 187–197). United Kingdom: Edward Elgar Publishing.



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