Wednesday, July 07, 2010

Behavioural Economics Applied to FIRMS

Most of the work we discuss here applies to what economists would loosely refer to as the consumer. Thus, the recent paper by Mark Armstrong and Steffen Huck is a useful jumping off point.

Behavioral economics as applied to firms: a primer

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Author Info
Armstrong, Mark
Huck, Steffen
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We discuss the literatures on behavioral economics, bounded rationality and experimental economics as they apply to firm behavior in markets. Topics discussed include the impact of imitative and satisficing behavior by firms, outcomes when managers care about their position relative to peers, the benefits of employing managers whose objective diverges from profit-maximization (including managers who are overconfident or base pricing decisions on sunk costs), the impact of social preferences on the ability to collude, and the incentive for profit-maximizing firms to mimic irrational behavior.

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