In Latvia, there is a growing initiative aimed at enhancing consumer ability to make economically beneficial choices. The Competition Council encourages the use of price comparison tools for selecting the best food products, while the Bank of Latvia advises mortgage borrowers to consider refinancing options. However, these efforts often fall short as consumer decisions tend to be irrational due to various cognitive biases and limitations in information processing.

Traditional economic theory posits the concept of 'homo economicus'—a rational individual making decisions based on complete information and stable preferences. Yet, behavioral economics reveals that real-life decision-making is significantly influenced by limited cognitive abilities, emotions, and systematic biases. Key biases include the status quo effect, loss aversion, framing effects, information overload, social influence, and confirmation bias, all of which can distort consumer perceptions and choices.

Market participants often exploit these cognitive biases to their advantage, creating information asymmetries that hinder effective consumer decision-making. Companies may deliberately generate confusion, limit comparability, or design complex pricing structures, such as drip pricing, to manipulate consumer behavior. In the digital economy, this asymmetry is exacerbated as businesses leverage data and algorithms to predict and influence consumer actions.

This manipulation can adversely affect competition, allowing market players to exploit consumer vulnerabilities to restrict competition and maintain market power. Such consumer behavior is not random but systematic and predictable, necessitating consideration in assessing competitive conditions and market operations.

Integrating behavioral economics into competition law analysis enhances the understanding of actual consumer behavior, moving beyond theoretical assumptions of rationality. For instance, traditional market definitions based on consumer reactions to price changes may overlook the impact of consumer inertia or biases, suggesting narrower market boundaries than theory predicts.

Moreover, in dominance assessments, barriers to influencing consumer behavior can increase the likelihood of anti-competitive strategies. If consumers struggle to compare offers or are reluctant to switch providers, even a firm with a small market share may act independently of competitive pressure. These considerations also apply to merger evaluations, where consumer difficulties in comparing offers could lead to greater competition reduction than traditional models suggest.

To fully leverage the potential of behavioral insights, competition authorities should rely on empirical data reflecting real consumer behavior rather than hypothetical surveys. Natural experiments, historical price change analyses, and market participant A/B testing results can provide more accurate insights into competitive conditions.

It is crucial to recognize that market participants are also susceptible to behavioral biases, such as overoptimism regarding market entry, which can lead to an overestimation of new entrants. Consequently, competition may appear active, but effective long-term competition may not solidify.

Incorporating behavioral economics into competition policy allows for a deeper understanding of consumer choices and market participant motivations. This approach offers a new paradigm where consumers are viewed as real individuals with limited capabilities but predictable behavior patterns that can be analyzed and considered in policy-making.

To realize this potential, close collaboration among competition authorities, policymakers, and academia is essential. Empirical research based on Latvian market data can help identify behavioral biases and their implications across various markets. Such a knowledge base enables the development of regulations grounded in observable behavior rather than solely in theory.

In the long run, this would allow competition policy to be not only reactive but also proactive, capable of identifying and addressing systematic flaws before they escalate into significant market distortions. Smart competition policy involves not just penalizing but also timely recognizing risks and creating a market environment that aids consumers in making better decisions, thereby enhancing economic efficiency and protecting overall societal welfare.