Bounded Rationality and Industrial Organization

Professor of Economics at Tel Aviv University and University College London

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