Introduction: Behavioral Industrial Organization
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The “standard” model in economics assumes fully rational consumers, input suppliers, and producers. Preferences are stable and defined over a narrow set of outcomes such as quality and quantity consumed, price paid, and risk borne. Other aspects of the environment such as reference points, default options, framing, and ambiguity are omitted. If present, asymmetric information stems from a common prior, and uninformed parties have both rational expectations and the strategic sophistication to make correct inferences from other players’ actions.
As the evidence began to show that these assumptions are not always valid, new models were developed, and behavioral economics was born. Behavioral economics uses evidence from psychology and experimental economics to enrich our understanding of decision making. Although economists have long recognized psychological concepts (see Rabin 1998; Angner and Loewenstein 2012 for reviews of the literature), formal analysis began with Simon’s 1955...
KeywordsWelfare Loss Behavioral Economic Industrial Organization Literature Social Welfare Loss Consumer Switching
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