Behavioral Economics as Applied to Firms: A Primer
45 Pages Posted: 17 Feb 2010
Date Written: February 2010
We discuss the literatures on behavioral economics, bounded rationality and experimental economics as they apply to firm behaviour 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.
Keywords: behavioral economics, firms, oligopoly, bounded rationality, collusion
JEL Classification: D40, L20, L21
Suggested Citation: Suggested Citation