Tuesday, July 07, 2015

Competition and Consumer Surplus and unSurplus

Is there another area of law so buried in an outmoded analysis as antitrust? My goodness, allocative efficiency is "wealth maximization" labeled differently. Richard Posner made a disasterous effort to claim wealth maximization was tethered to a desirable normative outcome and got clobbered for it in the early 1980s. It was not that hard since wealth maximization was cobbled together by Kaldor and Hicks in the last century to support a claim that economics could be an aid to forming public policy.  It can be, but no one has figured what it is saying.

Stranger than allocative efficiency is consumer surplus. It is the different between what you must pay for an item and the most you would have paid. The problem is "most you would have paid" is assessed before you actually pay or know the outcome.  So it is your hunch about the how happy you will be about making the purchase.

That is hardly any surplus in any rational sense. Consumer surplus should be the difference between what you paid  and the how much you valued what you actually got. A good way of showing this is the graph above. D1 is the usual one based on expectations. D2 based on the most you would have paid had you know what the experience would be like. Yes, this reflects disappointment. The curve could shift up or even stay the same. My hunch is that shifts down because sellers are so intend on raising expectations. In time the market night draw the curves closer but who knows?

As you see, the consumer surplus as traditionally described is PCA. Experienced consumer surplus is PEB. Lower, right? No  it is even lower than that.  All those who bought units Q1-Q2 actually are worse off (negative consumer surplus). That loss in consumer surplus must be substracted from PEB. So actual consumer surplus is PFDB. Yet antitrust policy is designed to push purchases out to Q1 when Q2 is actually more consistent with maximizing consumer surplus.

Of course, I am just playing around with some ideas suggested by the work of Kahneman and others on the difference between expected or decisional utility and experienced utility.

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