The prime criticism of the BE Approach is that, in contrast to the rational actor model, there is no unified theory of BE findings that can help policymakers formulate policy in any predictable or potentially useful way.124 These criticisms stem from the assertion that the increasing proliferation of BE findings have led to an inconclusive and broadly inconsistent model of human behaviour, and that even if some of the findings hold true, these are not sufficient to constitute an alternate theory of human behaviour.125 These criticisms have some force as the BE findings are much more complex and diverse than the simple assumption that underpins the rational actor theory (that humans are profit maximisers of their utility). The BE Approach claims ‘to greater realism in their behavioural models and more accuracy in their behavioural predictions will be empirically dubious and incomplete at best and empirically false and misleading at worst.’126 In this way, the BE Approach does not proscribe where their predictions will occur and where they will not127 and thus fails to offer any clear policy implications for competition law.128
However, as mentioned previously, this has not stopped policymakers around the world from heeding the B.E findings to varying degrees when formulating policy. The reason that a universal theory of human behaviour has not yet been formulated is likely to be attributed to the fact that human behaviour is inherently complex; a fact that tends to be overlooked by many rational actor proponents. It may be that such an alternate theory may never be developed. This is not a sufficient reason to disregard the BE Approach, particularly when these findings have consistently refuted the basic assumptions underpinning the rational actor model.
Secondly, critics of the BE Approach argue that the behaviour of individuals varies widely, depending on particular differences in education, training, cognitive capacity, sex and cultural background, and thus these cognitive biases do not affect
124 See, eg, Joshua Wright and Judd. E Stone II, 'Misbehavioral Economics: The Case Against
Behavioral Antitrust' (2012) 33 Cardozo Law Review 1517, 1522; Amanda Reeves and Maurice E Stucke, 'Behavioral Antitrust' (2011) 86 Indiana Law Journal 1527, 1543.
125 Avishalom Tor, 'Understanding Behavioral Antitrust' (2013) 92 Texas Law Review 573, 608. 126 Gregory Mitchell, 'Why Law and Economics' Perfect Rationality Should Not Be Traded for
Behavioral Law and Economics' Equal Incompetence' (2002) 91 Georgetown Law Journal 67, 122.
127 Wright and Stone II, above n 124, 1534. 128 Ibid 1526.
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humans consistently.129 This criticism is directed at the fact that BE theorists fail to comprehend that human behaviour is neither constant nor uniform ‘but rather variable and heterogeneous’ and relies on an assumption of a set of deviations from the rational actor model that does not exist.130 Furthermore, it is contended that the incorporation of the BE Approach will add to the complexity of policy regulation as ‘the state of the literature is such that there appears to be too many ways in which consumers stray from the rational actor model, often in ways that conflict with each other.’131
The fallacy in this argument is that it assumes that the BE approach attempts to provide a ‘meaningful overall characterisation of the quality of human judgment which is neither possible nor sought after.’132 This is not to say that this approach is the only credible view of human decision making capabilities but it is one that provides a more accurate reflection of reality and presently can play a role in certain fact specific contexts, such as merger review.133 This criticism of the BE approach is thus unpersuasive.
However, these claims have been disputed by many economists and proponents of the rational actor model, who assert that the BE findings are equally empirically flawed as those conducted by economists employing the rational actor assumption.134 In this respect, the proponents of the rational actor model assert that the BE findings are conducted using similar methods and therefore BE advocates cannot criticise them on this basis.135 Moreover, there are claims that the BE findings are a product of misleading questions where people believe that they are giving the right answer to a different question than the one the experimenter believes they are answering.136 Critics of the BE Approach thus claim that the findings of BE are as unreliable and inconsistent with human decision making as the rational actor model.
129 Mitchell, above n 126, 83. 130 Tor, above n 125, 579.
131 Productivity Commission, above n 78, 89. 132 Gilovich, Griffin and Kahneman, above n 46, 9.
133 Amanda Reeves, 'Behavioral Antitrust: Unanswered Questions on the Horizon' (2010) The Antitrust Source 14.
134 Reeves and Stucke, above n 124, 1538-1539. See also Richard A Posner, 'Rational Choice,
Behavioral Economics, and the Law' (1997) 50 Stanford Law Review 1551, 1566; Mitchell, above n 126, 114-119.
135 Some have argued that the approach is less useful than a Post-Chicago analysis: Wright and Stone
II, above n 124, 1551.
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These criticisms have not been accepted by those who endorse the BE Approach who respond that their findings have been consistently replicated in real- life situations and are thus more accurate than the generalised assumptions underpinning the rational actor model.137 For example, much BE research is based on actual market transactions, including field experiments and data.138
A more credible criticism relates to the way that the BE findings are currently published, as there is no established means of careful peer review nor are the BE findings subject to a well-recognised standard of measurement, such as the psychological standard.139 On this basis, it is difficult to investigate and assess the credibility of each of the BE findings as they continue to emerge. Like any new area of research, there is a need for each new finding to be carefully reviewed, and the BE approach is no exception. The reason that this chapter focuses on the findings that are well known and generally accepted is to help overcome these credibility issues. The way in which the BE research should be standardised is beyond the scope of this thesis, but it is nevertheless important that any research in its infancy is approached carefully.
A third criticism is that even if behaviour appears to be irrational facially, more often than not, there is a rational explanation for the behaviour.140 Christopher Leslie gives the example of predatory pricing in the market to show that behaviour that would seemingly appear irrational may be in fact directed towards a more rational long-term business strategy.141 Where one firm engages in dangerous predatory pricing, it is not necessarily because the firm wants to, but by acting irrationally, that firm may be able to drive out the other competitors in the monopoly, in a similar way to the game of ‘chicken.’142 Leslie provides many other examples that illustrate this point.143
137 See, eg, Reeves and Stucke, above n 124, 1539.
138 Stefano DellaVigna, 'Psychology and Economics: Evidence from the Field' (2009) 47 Journal of Economic Literature 315, 320- 365.
139 Mitchell, above n 126, 125.
140 See, eg, Amital Etzioni, 'Behavioural Economics: Toward a New Paradigm' (2011) 55 American Behavioral Scientist 1099, 1104; R Andreano and J Suiegfried, The Economics of Crime (John Wiley,
1980); Becker, above n X; Charles Murray, Losing Ground: American Social Policy 1950-1980 (BasicBooks, 1st ed, 1984).
141 Christopher R Leslie, 'Rationality Analysis in Antitrust' (2010) 158 University of Pennsylvania Law Review 261, 295-297.
142 Ibid 296. 143 Ibid 273.
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For those who endorse the BE approach, Leslie’s argument may be true for some aspects of human behaviour, but it does not justify the general assertion that all irrational behaviour is rational. Leslie in many ways contradicts himself by calling upon some of the findings from the BE approach to justify the rational actor model. He speaks of judicial bias as having a significant bearing on the way that rationality is constructed.144 Unbewittingly, it seems, he is trying to explain that irrational behaviour is rational by drawing upon concepts of the BE approach.
Another criticism directed at the BE approach is that it acts as a restriction on individual liberty and is paternalistic in nature.145 This aspect has been extensively debated and discussed in forums such as the OECD146 and the Australian Productivity Report into behavioural economics and policy,147 which centres upon the issue of the potential negative impacts of incorporating BE findings into policy.
Liberty is one of the key values in our society as ‘the capacity to live one’s life in an autonomous way is one of the most central of all social values in modern, democratic societies.’148 The concepts of liberty and autonomy rest on the notion that everyone in our society is free to make their own choices, and to also make their own mistakes, and to learn from them. Paternalism, particularly in its most extreme form, poses a direct threat to our notions of liberty and autonomy of decision-making through State intervention into individual choices, oft referred to as the ‘Nanny State.’149
It is claimed that by incorporating BE findings into policy-making, particularly consumer policy, which directly influences individual decision-making, the state is removing the autonomy of individuals, and in most cases, without their awareness or consent.150 If it is accepted that liberty and autonomy of the individual is an important value of our democratic society, then any infringement of this value should be treated very carefully.
144 Ibid 307-317.
145 See, eg, Joshua Wright and Douglas Ginsburg, 'Behavioral Law and Economics: Its Origins, Fatal
Flaws, and Implications for Liberty' (2012) 106 Northwestern University Law Review 1033, 1070.
146 See, eg, Lunn, above n 61, OECD, Behavioural Economics OECD
<http://www.oecd.org/gov/regulatory-policy/behavioural-economics.htm>.
147 See Productivity Commission, above n 78. 148 Ibid 99.
149 Ibid. 150 Ibid 100.
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One of the most prominent responses to this criticism has been the development of the theory of ‘Nudge’ by Richard Thaler and Cass Sunstein.151 This approach seeks to influence the choices of individuals without constraining these choices. The acronym NUDGE stands for the following:
- iNcentives – does not at any point try to discredit supply and demand theory of traditional economic theory – looks at key questions such as: Who uses? Who chooses? Who pays? Who profits?
- Understand mappings – ‘A good system of choice architecture helps people to improve their ability to map and hence to select options that will make them better off.’
- Defaults – based on the premise that humans will often chose the path of least resistance152
- Give feedback – ‘the best way to help Humans improve their performance is to provide feedback.’ Examples include warning labels etc
- Expect error – humans are susceptible to making errors.
- Structure complex choices – ‘People adopt different strategies for making choices depending on the size and complexity of the available options.’ Sustein and Thaler dub this form of policy making as ‘libertarian paternalism,’ which strikes at the core of the assumptions that underpin classical economic theory that people always make decisions in their best interest.153 They argue that in most forms of policymaking, paternalism is unavoidable and as long as it is libertarian paternalistic, then individuals still have the freedom of choice in decision making and this is therefore acceptable.
As a theory in its infancy, the BE approach does provide useful insights into human decision-making in an attempt to more accurately reflect a model of human behaviour. The theory is subject to wide criticism and debate, despite its foothold in policy-making circles around the world. One view is that the approach relies on outdated psychological testing that was appropriate for the time in which it was
151 See Thaler and Sunstein, above n 72; Richard Thaler and Cass Sunstein, 'Libertarian Paternalism'
(2003) 93 The American Economic Review 175.
152 Thaler and Sunstein, above n 72, 87. 153 See Thaler and Sunstein, above n 151.
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developed, yet it does not account for the significant developments in neurological science that have occurred since the 1980s.154
Professor Jones advocates for a convergence of fields to broaden and enrich the BE analysis, such as the incorporation of research involving disciplines such as evolutionary biology that will ‘blend the many virtues of BE with virtues of other disciplines.’155 There are others who also recognise the value of the BE approach but remain cautious of the way it should be incorporated into public policy and adopt the view that the BE approach should ‘supplement not substitute’ the existing rationality model, given its current limitations.156
As this section has demonstrated, there is much further development needed within the BE approach in order for it to provide a cogent model or set of criteria that can be used in policy making. This research is beyond the scope of this thesis. Instead, what can be gained from this discussion is the recognition of the flaws inherent within the rational actor model. Whilst no alternative theory exists to replace this theory, the focus must be on supplementing and enhancing the existing model. The next part will outline a model that attempts to achieve this within the context of the immunity policy.
C A New Approach to Assessing Cartel Immunity
This chapter has demonstrated that the neo-classical rational actor model is limited in its ability to predict human behaviour. There have been a number of alternative theoretical developments, most notably the BE Approach, which seek to overcome these limitations. Whilst some of the main findings of the BE Approach potentially impact the immunity policy’s operation, the most significant limitation with this approach is that it does not provide an overarching theory or a cogent set of criteria that can be used to assess the policy. As demonstrated in Chapter II,157 the immunity policy was designed within the neo-classical framework as part of the DOJ’s anti- cartel enforcement agenda. The criterion most commonly used to assess the policy’s
154 Owen Jones, 'Why Behavioral Economics Isn't Better, and How it Could Be' (Vanderbilt Law
School - Law & Economics Working Paper Number 14-30 - Public Law & Legal Theory Working Paper Number 14-32, 2014) 22.
155 Ibid 24.
156 Tor, above n 125, 88.
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‘effectiveness’ was also designed by the DOJ using this classical deterrence framework.158 According to the former Director of Criminal Enforcement at the DOJ, Scott Hammond, the three ‘cornerstones’ of an effective immunity policy are:
1. Threat of Severe Sanctions 2. High Risk of Detection
3. Transparency and Predictability of Enforcement
1 Threat of Severe Sanctions
It has been accepted in a number of jurisdictions that the threat of criminal sanctions provides the most effective deterrence of serious cartel conduct, making the incentive to apply for immunity even greater.159 These assumptions are based on the classical deterrence theory that presumes that the ‘rational actor’ will be deterred from committing crimes when the risk of detection is high and the sanctions are severe.160 According to Hammond, the threat of severe sanctions is premised on two considerations:
(a) The perceived risks must outweigh the potential rewards: In a simple cost- benefit analysis, the perceived benefits must outweigh the perceived costs. (b) Criminal sanctions provide the greatest inducement to cooperation: The
DOJ believes that the threat of criminal sanctions is the greatest threat to an individual and this is the primary reason that many companies will not engage in cartel conduct in the United States.161
2 High Risk of Detection
According to Hammond, a high risk of detection from regulatory enforcement
158 See, Scott D Hammond, 'Cornerstones of an Effective Leniency Program ' (Department of Justice,
2004).
159 This is primarily illustrated through the implementation of criminal penalties for cartel conduct in
for example Australia, Canada, the United Kingdom, the United States: see, eg, Clarke, above n 17.
160 See,eg, Harding, above n 91. 161 Hammond, above n 158, 7-9.
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agencies is another crucial element of a successful immunity regime and it is important that sufficient resources are allocated to these agencies to assist in achieving this end.162 Without a high risk of detection, cartel members will not be inclined to come forward to report their misconduct in exchange for immunity. In order to induce cartel participants to come forward, Hammond states that there is a need to create a culture that condemns white-collar crime. He also believes it is necessary to introduce individual immunity to create distrust between corporations and their employees. Additionally, regulatory agencies must be given robust investigatory powers to ensure that there is a real perceived risk of action being taken by the authorities for those who engage in cartel conduct.163
3 Transparency and Predictability in Enforcement
The third hallmark of an effective immunity program, according to Hammond, is transparency and predictability. An immunity applicant needs to be able to assess, with a sufficient level of certainty, that their application will be successful. To achieve this, the DOJ has published its standards and policies in relation to leniency and also provides an explanation as to how the DOJ will exercise its prosecutorial discretion in its application of these standards and policies:
The Division has sought to provide transparency in the following enforcement areas: (1) transparent standards for opening investigations; (2) transparent standards for deciding whether to file criminal charges; (3) transparent prosecutorial priorities; (4) transparent policies on the negotiation of plea agreements; (5) transparent policies on sentencing and calculating fines; and (6) transparent application of our Leniency Program.164
The DOJ has also published a number of model conditional immunity templates that are publicly available for potential applicants to review.165 Hammond believes that the sacrifice of prosecutorial discretion through the granting of upfront
162 Ibid 9-10.
163 Ibid 12. 164 Ibid 19.
165 Department of Justice, 'Model Corporate Conditional Leniency Letter' (Department of Justice -
Antitrust Division, 2008) <http://www.justice.gov/atr/public/criminal/239524.htm>; Department of Justice, 'Model Individual Conditional Leniency Letter' (Department of Justice - Antitrust Division, 2008) <http://www.justice.gov/atr/public/criminal/239526.htm>.
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immunity is necessary to create the high level of certainty necessary for potential applicants to come forward.166
The above three criteria have been widely endorsed in the competition community as the primary method to assess the effectiveness of an Immunity Policy.167 It is clear that these criteria are premised on the neo-classical assumptions that humans are rational actors, based on classical deterrence theory. They are based on the rational actor model, which has been shown in this chapter to be severely limited in its ability to predict human behaviour. By employing the rational actor model to assess the effectiveness of the Immunity Policy, the policy is viewed in a vacuum, isolated from the wider enforcement context in which it operates, including its interactions or impact on other areas of the law.168
Professor Caron Beaton-Wells recognises the limitations of the current effectiveness criteria to assess cartel immunity.169 Beaton-Wells points to recent figures released by the ACCC that indicate that the initial signs of the introduction of criminal sanctions for cartel conduct appear to contradict the impact that severe sanctions would have on immunity applications.170 In fact, Beaton-Wells states that the introduction of criminal sanctions may have had the opposite effect than the ACCC intended, with a reduction in the overall number of immunity applications.171 This could be attributed to a number of factors, such as the newly forged relationship between the ACCC and the CDPP, where the processing of immunity applications in