Bounded Rationality and Industrial Organization

Grounded in key observations in consumer psychology, Bounded Rationality and Industrial Organization develops non-standard models of "boundedly rational" consumer behavior and embeds them into familiar models of markets.

List of contents

• 1 Introduction


• 1.1 Bibliographic Notes


• I Anticipating Future Preferences


• 2 Dynamically Inconsistent Preferences I: Unconstrained Contracting


• 2.1 The Multi-Selves Model


• 2.1.1 Naivety


• 2.2 Monopoly Pricing


• 2.2.1 Optimal Price Schemes for Sophisticated Consumers


• 2.2.2 Optimal Price Schemes for Naive Consumers


• 2.2.3 Screening the Consumer's Type


• 2.3 Competitive Pricing


• 2.4 Welfare Analysis


• 2.5 Educating Naive Consumers


• 2.6 The Interpretation of Naivety


• 2.7 Two Applications


• 2.8 Other Topics


• 2.8.1 The (?, ?) Model


• 2.8.2 Preference Heterogeneity


• 2.9 Summary


• 2.10 Bibliographic Notes


• 3 Dynamically Inconsistent Preferences II: Constrained Contracting


• 3.1 Two-Part Tariffs


• 3.1.1 Departure from Marginal-Cost Pricing


• 3.1.2 Welfare Analysis


• 3.2 Destabilization of Commitment Devices: Renegotiation and Spot Market


• Competition


• 3.3 Self-Control


• 3.3.1 Implications for Monopoly Pricing


• 3.3.2 Do Self-Control Costs Hamper Competition?


• 3.4 Summary


• 3.5 Bibliographic Notes


• 4 Dynamically Inconsistent Preferences III: Partial Naivety


• 4.1 Magnitude Naivety


• 4.1.1 Monopoly Pricing


• 4.1.2 Are More Sophisticated Consumers Always Better Off?


• 4.2 Frequency Naivety


• 4.2.1 First-Best Monopoly Pricing


• 4.2.2 Second-Best Monopoly Pricing


• 4.2.3 Does Competition Curb Exploitation?


• 4.3 Summary


• 4.4 Bibliographic Notes


• 5 Biased Beliefs without Dynamic Inconsistency


• 5.1 Monopoly Pricing with Over-Optimistic Consumers


• 5.1.1 Comparison with Related Models


• 5.2 Overconfidence: Three-Part Tariffs


• 5.3 Unforeseen Contingencies: Add-On Pricing


• 5.4 A Summary Exercise: Insurance Markets with Biased Consumers


• 5.4.1 Equilibrium Analysis when Subjective Beliefs are Observable


• 5.4.2 Equilibrium Analysis when Subjective Beliefs are Private Information


• 5.5 Summary


• 5.6 Bibliographic notes


• A Appendix to Part I: A Decision-Theoretic Perspective


• A.1 The Multi-Selves Model


• A.2 Self-Control Preferences


• A.3 The Relation between Self-Control Preferences and the Multi-Selves Model


• A.4 Other Classes of Temptation-Driven Preferences


• A.5 Bibliographic Notes


• II Responding to Market Complexity


• 6 Sampling-Based Reasoning: Price Competition and Product Differentiation


• 6.1 A Sampling-Based Choice Procedure


• 6.2 Price Competition and Technology Adoption


• 6.2.1 Nash Equilibrium


• 6.2.2 Welfare Analysis


• 6.3 Spurious Product Differentiation


• 6.3.1 Nash Equilibrium


• 6.3.2 Product Complexity as a Differentiation Device


• 6.4 Can the Market Educate Consumers?


• 6.5 Summary


• 6.6 Bibliographic Notes


• 7 Sampling-Based Reasoning: Obfuscation


• 7.1 A Model of Competitive Obfuscation


• 7.1.1 Nash Equilibrium


• 7.1.2 Welfare Analysis


• 7.2 Production Inefficiencies


• 7.3 Multi-Dimensional Prices


• 7.4 A Market Intervention: Introducing \Simple" Options


• 7.5 Summary


• 7.6 Bibliographic Notes


• 8 Coarse Reasoning


• 8.1 A Modeling Framework


• 8.2 Complex Price Patterns as a Discrimination Device


• 8.2.1 "DeBruijn" Price Sequences


• 8.2.2 Conditions for Profitability of Complex Price Patterns


• 8.3 Limited Understanding of Adverse Selection


• 8.3.1 A Buyer-Seller Example


• 8.3.2 A Benchmark: A Bayesian-Rational Buyer


• 8.3.3 A \Coarse" Buyer


• 8.3.4 Action-Dependent Feedback


• 8.4 Summary


• 8.5 Bibliographic Notes


• III Reference Dependence


• 9 Loss Aversion


• 9.1 Expected Price as a Reference Point: Monopoly Pricing


• 9.1.1 Reduced Price Variability


• 9.1.2 Impact on Expected Prices


• 9.2 Price Uniformity in a Duopoly Setting: \Kinked" Demand


• 9.3 Expected Consumption as a Reference Point: An \Attachment Effect"


• 9.3.1 Personal Equilibrium


• 9.3.2 Price Randomization


• 9.4 Discussion


• 9.4.1 Actual Prices as Reference Points


• 9.4.2 Pleasant Surprises


• 9.5 Summary


• 9.6 Bibliographic Notes


• 10 Inertia I: Price Competition


• 10.1 Price Competition under Consumer Inertia


• 10.2 Price-Frame Competition


• 10.2.1 Nash Equilibrium


• 10.2.2 Equilibrium Properties


• 10.2.3 Two Market Interventions


• 10.3 Consumer Switching


• 10.4 Asymmetric Default Assignment


• 10.5 A Few General Remarks


• 10.5.1 More than Two Frames


• 10.5.2 Revealed Preferences


• 10.6 Summary


• 10.7 Bibliographic Notes


• 11 Inertia II: Costly Marketing 261


• 11.1 A Model of Competitive Marketing


• 11.2 Nash Equilibrium


• 11.3 The Effective Marketing Property


• 11.4 Discussion


• 11.5 Summary


• 11.6 Bibliographic Notes


• IV Discussion


• 12 Recurring Themes


• 12.1 Complex Pricing Strategies


• 12.2 Spurious Variety


• 12.3 Market Transactions as a Form of Speculative Trade


• 12.4 How Effective are Competition and Consumer Protection Policies?


• 12.5 Externalities between Rational and Boundedly Rational Consumers


• 12.6 Conclusion


• 13 But Can't we Get the Same Thing with a Standard Model?


• 13.1 Rationalization via Modified Information


• 13.2 Rationalization via Modified Preferences


• 13.3 Rationalization via Endogenization


• 13.4 Discussion


• 13.5 Epilogue


• 13.6 Bibliographic Notes


• Bibliography


• Index

About the author

Professor of Economics at Tel Aviv University and University College London

Summary

Grounded in key observations in consumer psychology, Bounded Rationality and Industrial Organization develops non-standard models of "boundedly rational" consumer behavior and embeds them into familiar models of markets.

Additional text

Spiegler's Bounded Rationality and Industrial Organization is a beautifully written book. He makes a compelling case that understanding what happens when boundedly rational consumers meet sophisticated firms is both intellectually interesting and practically important. He has a wonderful feel for using rigorous models to clarify arguments and develops insights from a number of branches of the emerging literature in a parsimonious way. It is a must read book.

Product details

• Authors: Ran Spiegler, Ran (Professor Spiegler, Spiegler Ran
• Publisher: Oxford University Press
• Languages: English
• Product format: Paperback / Softback
• Released: 27.02.2014
• EAN: 9780199334261
• ISBN: 978-0-19-933426-1
• No. of pages: 240
• Subjects: Humanities, art, music > Psychology > Theoretical psychology; Social sciences, law, business > Business > Miscellaneous; BUSINESS & ECONOMICS / Economics / Theory, BUSINESS & ECONOMICS / Economics / Microeconomics, Economic theory & philosophy, Behavioural economics, Behavioural theory (Behaviourism), Behaviourism, Behavioural theory, Microeconomics, Economic theory and philosophy, BUSINESS & ECONOMICS / Economics / Social & Behavioral, PSYCHOLOGY / Psychotherapy / Behaviorism