Behavioural science (BeSci) can help policymakers leverage human biases to nudge good behaviour for better socioeconomic outcomes. However, applying BeSci for good stands at an impasse in the private sector, particularly in the rapidly evolving digital markets, where the prerogative of firms is profit maximisation. Dominant firms have rapidly set up embedded behavioural insights units or contracted external behavioural consultants to better influence consumer behaviour. A behavioural lens is imperative for regulators to understand and evaluate digital antitrust. On September 13, 2023, the US Justice Department called upon a behavioural economist as an expert witness to testify about Google’s anti-competitive influence on consumer behaviour — a landmark moment for BeSci in what is being touted as the US government’s first monopoly trial of the modern era. In 2022, the Competition Commission of India penalised Google for abusing its dominance in the context of the Play Store, primarily using a supplier-discrimination justification, which calls upon further regulatory evaluation with consumer behaviour at the forefront.
Firms with large market shares influence consumer behaviour since their market power consolidates at the cost of market competition and the growth of smaller firms. The European Union (EU) argues that existing competition law doctrines of the largest economies cannot effectively regulate dynamic digital markets. The EU enforced its Digital Markets Act (DMA) in 2022, whereby certain large digital platforms were designated as ‘gatekeepers’ of the market for whom ex-ante regulations are applicable. This led to Meta’s Threads, a direct rival of Twitter, being paused from rolling out in the EU due to concerns about market dominance and anti-competitiveness. The rationale is consumer convenience versus market dominance — while it would be convenient for existing Instagram users to use their login credentials for Threads and start using the new app, Threads would establish market dominance seemingly overnight. More than 2 billion monthly active users on Instagram could hop over. No smaller firm can attempt such growth rates.
The UK intends to follow suit with its Digital Markets, Competition and Consumers Bill (2023), designating certain large firms as having ‘Strategic Market Status (SMS)’ accompanied by conduct requirements for SMSes. These laws intend to create fairer digital markets by allowing smaller firms opportunities to compete without sacrificing innovation led by larger firms. Certain unfair practices of larger firms intend to be curtailed which influence consumer behaviour to increase profits disproportionate to the quality of the product offered and prevent consumers from seeking alternatives. The environment of a digital platform wherein a customer makes purchasing decisions, referred to as ‘choice architecture’, contains features that exploit ‘inert’ consumers. Inert consumers are a segment who are more susceptible to the exploitation of their behavioural biases. Here are two examples of how large firms influencing inert consumers is anti-competitive:
1. Add-on pricing: This is a familiar practice in digital markets wherein ‘convenience fees’ and other hidden costs are added at later stages of the purchase process. Even if a market has multiple alternatives offering the same product at lower prices, studies indicate that if there are enough ‘inert’ consumers, the existence of competition won’t stop firms from using add-on pricing (Gabaix and Laibson, 2006). This is because inert consumers exhibit inertia — they refrain from switching to alternatives once they have begun a purchase process as switching involves convenience costs and they’ve already gained momentum. When large firms create choice architectures that deliberately increase consumer inertia to place add-on prices that exceed alternatives in the market, smaller alternatives suffer.
2. Subscriptions and automatic renewal: Studies show that some consumers who buy subscriptions when the benefit they derive from the product exceeds the price continue to pay for it even after the benefit has fallen below the price. Einav, Klopack, and Mahoney (2023) demonstrate that inert consumers raise firms’ revenues by 14-200 percent as opposed to a market with fully attentive consumers. When subscribers are forced to review their subscriptions when their credit card information needs to be updated, subscriber retention rates drop significantly, indicating that in the absence of an intervention that forces consumers to pay attention, consumers tend to continue paying for services that don’t offer them utility. When subscription inertia is placed in the context of large firms with choice architectures that deliberately make it difficult to unsubscribe, competition suffers.
Curbing Unethical Nudging
An effective means of reducing the unethical nudging of consumer behaviour by large firms is by nudging the behaviour of these firms themselves. Regulators can realign profit-maximising incentives driving firm behaviour to overlap with pro-consumer welfare outcomes. For instance, in the food and beverage industry, if consumers place greater importance on food prices rather than food standards, competition leads firms to compromise on the latter. If consumers exhibit present bias, firms will compete on the factors that consumers care about, like conveniently available credit cards with low upfront fees, but higher late payment charges. There is scope for a social norms-based intervention for recalibrating the incentives of digital markets. If firms perceive that consumers care about the disclosure of sludge in choice architecture and measures taken to reduce it, firms will behave accordingly in an attempt to attract customers. India’s Open Network for Digital Commerce (ONDC), established by the department for promotion of industry and internal trade, creates an alternative market system that emphasises seller welfare by removing the need for large e-commerce platforms and their premiums for accessing their brand and consumer pool. Consumers receive more freedom to choose who they buy from and support local economies. The growth of such a system may prompt existing large platforms to reorient their seller and consumer interactions competitively.
India’s Competition Act, 2002 created primarily to regulate physical markets in an ex-post manner, which does not view market concentration by itself as harmful to competition, may not be sufficient to regulate digital markets. Owing to their rapidly evolving nature, significant damage to competition and consumer welfare may already have occurred by the time digital firms undergo ex-post scrutiny. There is benefit in reviewing the notion that bigness is not a threat to competition, as bigness in digital markets is accompanied by network effects that supplement the switching costs that exploit inert consumers. India’s digital consumers can benefit from the prevention of unfair practices set out by the EU and UK regulations while avoiding the dampening of innovation led by large firms — a win-win situation.
Pavan Mamidi is Director and Aayush Agarwal is Senior Associate and Lab Manager, Centre for Social and Behaviour Change, Ashoka University. Views are personal, and do not represent the stand of this publication.
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