Bounded Rationality and Industrial Organization

Bounded Rationality and Industrial Organization


By (author) Ran Spiegler

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  • Publisher: Oxford University Press Inc
  • Format: Hardback | 240 pages
  • Dimensions: 160mm x 236mm x 20mm | 499g
  • Publication date: 1 April 2011
  • Publication City/Country: New York
  • ISBN 10: 0195398718
  • ISBN 13: 9780195398717
  • Sales rank: 469,474

Product description

Conventional economic theory assumes that consumers are fully rational, that they have well-defined preferences and easily understand the market environment. Yet, in fact, consumers may have inconsistent, context-dependent preferences, or simply not enough brain-power to evaluate and compare complicated products. Thus the standard model of consumer behavior-which depends on an ideal market in which consumers are boundlessly rational-is called into question. While behavioral economists have for some time confirmed and characterized these inconsistencies, the logical next step is to examine the implications they have in markets. 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. It then rigorously analyses each model in the tradition of microeconomic theory, leading to a richer, more realistic picture of consumer behavior. Ran Spiegler analyses phenomena such as exploitative price plans in the credit market, complexity of financial products and other obfuscation practices, consumer antagonism to unexpected price increases, and the role of default options in consumer decision making. Spiegler unifies the relevant literature into three main strands: limited ability to anticipate and control future choices, limited ability to understand complex market environments, and sensitivity to reference points. Although the challenge of enriching the psychology of decision makers in economic models has been at the frontier of theoretical research in the last decade, there has been no graduate-level, theory-oriented textbook to cover developments in the last 10-15 years. Thus, Bounded Rationality and Industrial Organization offers a welcome and crucial new understanding of market behavior-it challenges conventional wisdom in ways that are interesting and economically significant, and which in the end effect the well-being of all market participants.

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Author information

Ran Spiegler is Professor of Economics at Tel Aviv University and University College London.

Review quote

Nobody thinks like Adam Smith when buying a toothbrush, but this is the assumption of consumer behavior offered in traditional economics textbooks. Marketing experts used to laugh at such naivety, but they will have to take economic theory more seriously from now on. Ran Spiegler's book takes on the challenge of rewriting the theory of industrial organization without the classical assumption that economic agents are all rational supermen. This is an important book that nobody working on industrial organization will wish to be without. Ken Binmore, University College London 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. Glenn Ellison, Massachusetts Institute of Technology

Table of contents

1. Introduction ; I Anticipating Future Preferences ; 2. Dynamically Inconsistent Preferences I: Unconstrained Contracting ; 3. Dynamically Inconsistent Preferences II: Constrained Contracting ; 4. Dynamically Inconsistent Preferences III: Partial Naivety ; 5. Biased Beliefs without Dynamic Inconsistency ; II Responding to Market Complexity ; 6. Sampling-Based Reasoning: Price Competition and Product Differentiation ; 7. Sampling-Based Reasoning: Obfuscation ; 8. Coarse Reasoning ; III Reference Dependence ; 9. Loss Aversion ; 10. Inertia I: Price Competition ; 11. Inertia II: Costly Marketing 261 ; IV Discussion ; 12. Recurring Themes ; 13. But Can't we Get the Same Thing with a Standard Model? ; Bibliography ; Index