Bounded Rationality and Industrial Organization

Abstract

This book synthesizes recent developments in the theory of Industrial Organization, incorporating aspects of consumer psychology that are absent from the standard model of rational choice. The book analyzes three classes of market models in which profit-maximizing firms interact with boundedly rational consumers, each capturing a different aspect of bounded consumer rationality: dynamically inconsistent preferences and biased beliefs regarding future preferences, limited ability to understand price complexity, and reference-dependent choice. These models address questions such as: Can we explain observed pricing, marketing and product differentiation strategies as equilibrium responses consumers' bounded rationality? Do market forces protect boundedly rational consumers from being exploited by firms? What is the role of market regulation and consumer protection policies in this regard? How do firms discriminate between consumers according to differences in their rationality? The book is meant to serve as a textbook for graduate courses in microeconomic theory, industrial organization or behavioral economics.

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