Competition and causal inference: Economic choice and welfare analysis under potential outcomes

We apply widely accepted arguments regarding the inferential properties of scientific experiments to analyse markets and consumer decision-making. Market competition is depicted as a means of generating counterfactual data regarding product characteristics resembling experiments’ use of treatment and control conditions to facilitate causal inference. Much like scientific experimentation, competition creates counterfactual data that allows consumers to make causal inferences regarding rival products’ treatment effects upon their welfare. Absent the multiplicity of differentiated goods that competitive markets produce, consumers cannot engage in causal inference and demand curves may become inaccurate specifications of marginal social benefit. This application of the potential outcomes framework to microeconomics offers an account of market competition that has implications for understanding welfare problems created by uncompetitive and monopolistic markets, industrial organisation, and the underlying justifications for anti-trust policy.