Bounded rationality and industrial organization

■ Bounded Rationality and Industrial Organization This page intentionally left blank Bounded Rationality and Industrial Organization Ran Spiegler 3 Oxford University Press, Inc., publishes works that further Oxford University’s objective of excellence in research, scholarship, and education Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Copyright © 2011 by Oxford University Press Published by Oxford University Press, Inc 198 Madison Avenue, New York, New York 10016 www.oup.com Oxford is a registered trademark of Oxford University Press All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press Library of Congress Cataloging-in-Publication Data Spiegler, Ran Bounded rationality and industrial organization / Ran Spiegler p cm Includes bibliographical references and index ISBN 978-0-19-539871-7 (cloth : alk paper) Consumer behavior Decision making Consumption (Economics)–Psychological aspects Industrial organization (Economic theory) I Title HF5415.32.S67 2011 658.8 342–dc22 2010015046 Printed in the United States of America on acid-free paper ■ CONTENTS Preface Introduction 1.1 Bibliographic Notes PART ONE ix ■ Anticipating Future Preferences Dynamically Inconsistent Preferences I: Unconstrained Contracting 2.1 The Multi-Selves Model 2.1.1 Naivete 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 Naivete 2.7 Two Applications 2.8 Other Topics 2.8.1 The (β , δ ) Model 2.8.2 Preference Heterogeneity 2.9 Summary 2.10 Bibliographic Notes 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 v 11 12 13 14 15 15 18 18 20 21 22 23 25 25 26 28 28 30 30 31 33 34 36 39 40 41 42 vi Contents ■ Dynamically Inconsistent Preferences III: Partial Naivete 4.1 Magnitude Naivete 4.1.1 Monopoly Pricing 4.1.2 Are More Sophisticated Consumers Always Better Off? 4.2 Frequency Naivete 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 43 43 43 45 46 47 48 51 52 52 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 53 54 57 60 62 PART TWO ■ 67 69 70 73 73 Responding to Market Complexity Sampling-Based Reasoning I: 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 Sampling-Based Reasoning II: 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 77 77 78 80 82 84 85 86 90 92 92 94 94 96 100 100 103 Contents 10 vii 7.4 A Market Intervention: Introducing “Simple” Options 7.5 Summary 7.6 Bibliographic Notes 104 107 108 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 110 110 112 114 PART THREE ■ ■ 115 118 119 120 120 122 123 124 Reference Dependence Loss Aversion 9.1 Expected Price as a Reference Point: Monopoly Pricing 9.1.1 Reduced Price Variability 9.1.2 Impact on Average 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 127 128 130 134 135 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 147 148 151 153 157 158 159 160 161 161 163 138 139 141 143 143 144 145 146 viii ■ 11 Contents 10.6 Summary 10.7 Bibliographic Notes 163 164 Inertia II: Costly Marketing 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 166 167 170 176 178 180 180 PART FOUR 12 ■ Discussion 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 183 183 184 185 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 188 190 194 196 199 200 201 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 202 202 204 Bibliography Index 213 219 186 187 187 208 210 211 ■ PREFACE This book summarizes and synthesizes recent developments in the theory of Industrial Organization that incorporate departures from the standard model of consumer behavior in the direction of a “richer psychology.” It cannot be denied that the challenge of enriching the psychology of decision makers in economic models has been at the very frontier of theoretical research in the last decade, given an enormous boost by the behavioral economics movement However, while the subject has given rise to a large and varied literature that includes numerous research articles as well as a number of surveys and anthologies, one can think of very few proper textbooks that could serve a graduate-level course in economic theory Indeed, the most recent theory-oriented textbook of any relevance that I am aware of is Ariel Rubinstein’s 1998 Modeling Bounded Rationality, which preceded many of the developments that caused such a stir in our profession This book aims to narrow this gap, albeit in the very specific domain of industrial organization The book is meant to serve as a textbook for graduate courses in microeconomic theory, as well as theory-oriented courses in industrial organization or behavioral economics It is partly based on lecture notes from courses given at Tel Aviv University, University College London and the Helsinki Center of Economic Research In the course of writing this book, I have greatly benefitted from financial support by the European Research Council and the ESRC (UK) Parts of the research it is based on were supported by BSF and ISF grants I wish to thank several colleagues who gave comments on earlier drafts of book chapters: Eddie Dekel, Kfir Eliaz, Susana Esteban, Ignacio Esponda, Erik Eyster, Yves Guéron, Michael Grubb, Paul Heidhues, Philippe Jehiel, Barton Lipman, Marco Mariotti, Erik Mohlin, Michele Piccione, Jidong Zhou, and especially Ayala Arad for her consistently superb feedback I am hugely indebted to Ariel Rubinstein, who not only contributed concrete suggestions that helped me improve the exposition and proofs of several results, but also provided valuable encouragement throughout this project Ariel got me “hooked” on the subject of bounded rationality fifteen years ago, and I have continued to benefit from his work and his thoughts ever since Ayala Arad and Yves Guéron have provided truly spectacular research assistance In particular, Yves helped typesetting the manuscript and wrote the solution manual I am forever grateful to both My coauthors, Kfir Eliaz and Michele Piccione, deserve some of the credit for the material in the book, as our joint work has formed the basis of several chapters The Oxford University Press editors, Terry Vaughn and Joe Jackson, provided warm and reliable support Finally, I wish to thank the composer Steve Reich, whose music provided an indispensable soundtrack for the writing process If the book feels monotonous or repetitive at times, blame it on him ix 208 ■ Appendix to Part I: A Decision-Theoretic Perspective set of prizes Z includes a tempting alternative, say ice cream All other prizes are equally tempting (and less so than ice cream) Let x ∈ A and y ∈ B assign a probability of 0.2 and 0.4 to ice cream, respectively Assume that these are the only lotteries in A and B that assign positive probability to ice cream Assume further that c(A) = x and c(B) = y, as each of the two menus contains lotteries with a sufficiently high commitment value Let C be a singleton menu consisting of a degenerate lottery that assigns probability one to ice cream Now let α = 0.8 The menu α A + (1 − α )C includes a lottery that assigns probability 0.36 to ice cream, while α B + (1 − α )C includes a lottery that assigns probability 0.52 to ice cream All other lotteries in the two menus assign probability 0.2 to ice cream, and are therefore less tempting By Independence, if B ∗ A then 0.8B + 0.2C ∗ 0.8A + 0.2C However, from a normative point of view, nothing prevents the consumer from regarding a lottery that assigns a probability below 0.5 to ice cream as mildly tempting, while at the same time perceiving a lottery that assigns a probability above 0.5 to ice cream as highly tempting As a result, he may display the preference rankings B ∗ A and 0.8A + 0.2C ∗ 0.8B + 0.2C The reason that the independence axiom is less attractive here than in conventional Expected Utility Theory is that in the present context, choice behavior relies on the notion of “temptation utility.” Since this notion is meant to capture a primarily visceral response, there is no reason for it to satisfy normative criteria, such as linearity in the probability of prizes In contrast, in Expected Utility Theory, the considerations that guide decisions are meant to be entirely rational A comment on revealed preferences Proposition A.1 and Theorem A.1 are characterizations of first-period preferences over menus These are revealed-preference characterizations, in the sense that utility rankings over menus are meant to represent observed choices between menus In contrast, the interpretation of arg max x∈A [u(x) + v(x)] in Theorem A.1 or arg max x∈A v(x) in Proposition A.1 as the consumer’s second-period choice from the menu A goes beyond revealed preferences, because the representation theorems not address second-period choice Thus, in the case of Theorem A.1, although it makes perfect sense to interpret u + v as a representation of second-period choice and to interpret v as a representation of how tempting alternatives are, we should not view the theorem as providing a decision-theoretic, revealed-preference foundation for this interpretation The same holds for our interpretation of v in the case of Proposition A.1 The next section makes a point that emphasizes this limitation of utility representations of preferences over menus ■ A.3 T H E R E L A T I O N B E T W E E N S E L F - C O N T R O L PREFERENCES AND THE MULTI-SELVES MODEL So far, our comparison between the multi-selves model and the model of selfcontrol preferences assumed that in the former case, the consumer has no Appendix to Part I: A Decision-Theoretic Perspective ■ 209 uncertainty regarding his second-period preferences—as in the case of fully sophisticated consumers It turns out that when we enrich the multi-selves model by allowing the consumer to hold probabilistic beliefs regarding his second-period preferences (as in the case of partial frequency naivete explored in Chapter 4), the relation between the two models becomes tighter Proposition A.4 Suppose that a preference relation ∗ over P(X) can be represented by the functional W with (u, v) Then, ∗ is consistent with a multiselves model in which the first-period self is uncertain about the second-period self’s preferences Moreover, the first-period self’s preferences over X are represented by u Proof Suppose that ∗ over P(X) is represented by (A.1) with the commitment and temptation utilities being u and v Let us construct a multi-selves model, in which the first-period self’s preferences over X are represented by u, and there is uncertainty about the second-period self’s preferences Specifically, the secondperiod self’s preferences over X are represented by a utility function ku + v, where k ∼ U [0, 1] We will now show that the first-period preferences over menus induced by this multi-selves model can be represented by (A.1) Fix a menu A, and let x ∗ (k) denote any member of A that maximizes u over the ¯ = u[x ∗ (k)], v¯ (k) = v [x ∗ (k)], w(k) = set arg max x∈A [ku(x) + v(x)] Define u(k) ku(k) ¯ + v¯ (k) Thus, the first-period self’s induced preferences over menus are represented by the indirect expected utility from second-period choice, given by the functional V (A) = u(k)dk ¯ By the definition of x ∗ (k), ku[x ∗ (k)] + v [x ∗ (k)] ≥ ku(x) + v(x) for every x ∈ A ¯ + v¯ (k) ≥ ku(k ¯ ) + v¯ (k ) for every k ∈ [0, 1] In particular, this means that k u(k) Thus, w(k) is a maximum over a collection of affine functions, and therefore it is ¯ We convex and differentiable almost everywhere over [0, 1], where w (k) = u(k) can write w(1) as follows: w(1) = w(0) + w (k)dk But since w(1) = max x ∈A [u(x) + v(x)] and w(0) = max y∈A v(y): V (A) = max[u(x) + v(x)] − max v(y) x ∈A y ∈A which is exactly the functional W with (u, v) This result is attractive not only because of the elegance of its proof, but also because it provides an alternative interpretation of the betweenness axiom The idea that a consumer who is uncertain about his second-period preferences will 210 Appendix to Part I: A Decision-Theoretic Perspective ■ rank A ∪ B between A and B is intuitive, because it reflects some averaging of the possible second-period preferences Of course, the multi-selves and the self-control models differ in the second-period behavior, and consequently the distinction between the models is important for the firms that interact with the consumer Without observing the firms’ behavior or the consumer’s second-period behavior, we cannot distinguish between the two models.4 The multi-selves model with partial frequency naivete discussed in Chapter did not involve a continuum of second-period possible preference relations, but only two, one of which coincides with the first-period self’s preferences Chatterjee & Krishna (2009) provide an axiomatization of the first-period preferences over menus that are induced by such a model It typically violates the betweenness axiom, hence it generally fails to produce the same first-period choices over menus as the model of self-control preferences ■ A.4 O T H E R C L A S S E S O F T E M P T A T I O N - D R I V E N PREFERENCES The model of self-control preferences is a special case of a model of preferences over menus that captures a taste for commitment due to the presence of temptations In this section I present two generalizations The functional W belongs to a family called “finite additive expected-utility (EU) representations.” Specifically, let X = (Z), where Z is some finite set of prizes We say that a preference relation ∗ over P(X) has a finite additive EU representation if there exists a pair of finite collections of expected utility functions over X, (wi )i=1, ,I and (vj )j=1, ,J , such that the function J I V (A) = max wi (x) − i=1 x ∈A max vj (x) j=1 x ∈A represents ∗ In the model of self-control preferences, I = J = Throughout this section, assume that ∗ has a finite additive EU representation The class of preferences over menus of lotteries that possess such a representation is characterized by the independence axiom discussed above and a suitable continuity property One generalization of the model of self-control preferences is based on the idea that temptation can occur on many dimensions For instance, one food product can be tempting because of its taste, another because of its design, and so forth The following functional captures this idea: V ∗ (A) = max[u(x) − s(A, x)] x ∈A This finding does not contradict the distinction we made earlier, between the continuity of selfcontrol preferences and the discontinuity of preferences over menus induced by the (deterministic) multi-selves model The latter is “‘smoothed out” by the uncertainty regarding second-period preferences Appendix to Part I: A Decision-Theoretic Perspective ■ 211 where J s(A, x) = [max vj (y) − vj (x)] j=1 y ∈A is the cost of self-control involved in choosing x from the menu A The following result provides an axiomatic characterization of V ∗ Proposition A.5 The functional V ∗ represents P(X), A ∗ B implies A ∗ A ∪ B ∗ if and only if for every A, B ∈ Another generalization is based on the idea that the consumer may be uncertain about the intensity of temptations The following functional captures this idea: V ∗∗ (A) = qi max [u(x) − γi s(A, x)] i where qi > for all i, i x ∈A qi = 1, γi ≥ for all i, and s(A, x) = [max v(y)] − v(x) y ∈A In this representation, temptation utility is always v, but the exact trade-off between temptation and commitment utilities is random The following result provides an axiomatic characterization of V ∗∗ Proposition A.6 The functional V ∗∗ represents conditions hold: ∗ if and only if the following (i) for every A ∈ P(X) there exists x ∈ A such that {x } (ii) for every A, B ∈ P(X), A ∗ B implies A ∪ B ∗ B ∗ A; Note that each functional is characterized by a different weakening of the betweenness axiom that imposes a different structure on the taste for commitment If there is no taste for commitment—that is, if A ⊂ B implies B ∗ A for every A, B ∈ P(X)—it can be shown that J = in the finite additive EU representation of ∗ ■ A.5 B I B L I O G R A P H I C N O T E S The characterization of the multi-selves model is a simplified version of an axiomatization given by Gul & Pesendorfer (2001) The model of self-control preferences and its axiomatization are also due to Gul & Pesendorfer (2001) The result that the two models are formally linked is due to Dekel & Lipman (2010) As mentioned above, Chatterjee & Krishna (2009) axiomatize the two-state version of the multi-selves model with uncertain second-period preferences Dekel, 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Choice under Conflict: The Dynamics of Deferred Decision Psychological Science, pp 358–361 Uthemann, A (2005), Competitive Screening of Consumers with Non-common Priors Working paper, UCL Varian, H R (1980), A Model of Sales American Economic Review 70(4), 651–659 Wilson, C M (2010), Ordered Search and Equilibrium Obfuscation International Journal of Industrial Organization 28(5), 496–506 Zauberman, G (2003), The Intertemporal Dynamics of Consumer Lock-in Journal of Consumer Research 30(3), 405–419 Zhou, J (2009), Reference Dependence and Market Competition Journal of Economics, Management and Strategy, forthcoming ■ INDEX comparative statics, 25, 81, 155, 193 complexity, 5, 7, 33–34, 104, 106–107 as a differentiation device, 86–88 as a discrimination device, 112, 114, 117, 123–124, 128 as an obfuscation device, 115, 123, 128 Conlisk, J., 92 consideration relation, 168–170, 176–179 contingencies, unforeseen See unawareness conversion rates, 159–160, 178 correlation between payoff-relevant and payoff-irrelevant decisions, 157–185, 176–178, 180 Courty, P., 73, 146 credit cards, 1, 24, 28–29, 35, 103 cross subsidy, 65, 187 add-on pricing, 5, 7, 54, 63, 67, 73, 103 adverse selection, 112, 118–121, 123–124 alternatives, irrelevant, 5, 23–24, 28, 58–59, 107, 180, 184–185 Anderson, C J., 164 Armstrong, M., 8, 73, 164 Ashraf, N., 29 attachment effect, 139–141, 146 attention, 2, 66, 166–167, 171–180, 185 Ausubel, L., 24, 29 Bar-Gill, O., 29, 42 Baron, J., 164 Ben-Shahar, O., 42 betweenness, 205–207, 209–211 bias default bias, 147–151, 163, 165 present bias, 11, 25–26, 29, 33, 148 projection bias, 13, 52 Borgida, E., 93 Brown, G D A., 93 Brown, J., 109 De Bruijn, 114, 117, 124 defaults, 5, 14, 48, 54, 61, 78–82, 84, 87, 91, 94, 104–106, 116, 127, 136, 147–152, 155–156, 159–173, 176–180, 183, 190–194, 197 Dekel, E., 211, 212 DellaVigna, S., 8, 28, 29, 33, 42 demand, kinked, 135–138, 143–144 Dow, J., 124 Caplin, A., 197 Carlin, B.I., 108, 165 Carroll, G D., 164 Chater, N., 93 Chioveanu, I., 165 Choi, J J., 164 choice overload, 147, 150, 164 commitment, 3, 13, 33, 37, 202–203, 210–211 commitment devices, 15, 18–19, 21, 26–30, 32, 34–36 commitment utility, 36, 40, 204, 207–209, 211 comparability, 153–162, 186, 197–198 educating consumers, 2, 21, 63, 66–67, 80, 90, 92, 103, 186, 202 Eliaz, K., 29, 52, 73, 146, 165, 179, 180 Ellison, G., 8, 92, 108, 109 Esponda, I., 124 Esteban, S., 29, 42 exploitation, 2, 7, 18, 21, 23, 25, 28, 34, 41, 45–46, 50–52, 56–57, 62, 65–66, 73, 82–83, 106, 184–186 219 220 ■ Index externalities, 7, 48, 59, 60, 73, 166, 173, 187 Eyster, E., 124 Fershtman, C., 164 Fisher Ellison, S., 109 Fishman, A., 164 framing, 148, 151–165, 170, 184, 197–198 frame neutrality, 162 Frederick, S., 28 Friedman, M., 195 Fudenberg, D., 92 Gabaix, X., 73 Gilbert, D., Gilboa, I., Gottlieb, D., 42 Green, J R., 98, 102 Grubb, M D., 73 Gul, F., 42, 146, 211, 212 health clubs, 26, 33, 39, 57 Heidhues, P., 29, 52, 146 Hossain, T., 109 Huberman, G., 164 inertia, 147–180 intransitivity, 141, 163, 169 Isoni, A., 146 Iyengar, S., 8, 164 Jehiel, P., 124 Jiang, W., 164 K˝oszegi, B., 29, 42, 52, 146 Kahneman, D., 7, 93, 146 Kamenica, E., 164, 185 Karlan, D., 29 Karle, H., 146 Klemperer, P., 165 Knetsch, J L., 146 Koessler, F., 124 Laibson, D., 25, 73, 164 Landier, A., 73 Lepper, M R., 164 Li, H., 73 Lipman, B L., 211, 212 Loewenstein, G., 28, 52 Loomes, G., 146 loss aversion, 5, 127–147, 184 Lucas Jr., R E., 186, 198 Madrian, B C., 164 Malmendier, U., 28, 29, 33, 42 Masatlioglu, Y., 165 Mas-Colell, A., 98, 102 max-min, 79–80, 83, 100, 149–150, 152, 157–158, 160, 162–164, 169, 172–178, 180 menus, 12, 18, 28, 37, 42, 51, 58, 167–180, 202–212 Metrick, A., 164 Milgrom, P., 91 Miravete, E J., 73 Miyagawa, E., 29, 42 Morgan, J., 109 multi-selves model, 12–14, 20, 28, 30, 36–40, 43, 202–204, 207–212 mutual funds, 1, 78–79, 185 naivete, 4, 13, 15, 17–28, 30–34, 36–37, 39, 42–48, 51–53, 57–60, 63–67, 92–93, 107, 110, 148, 170, 183–186, 195 partial naivete, 13, 43–48, 50, 54, 57, 210 magnitude naivete, 44, 47–48, 52 frequence naivete, 48, 50, 52, 54, 57, 209–210 strategic naivete, 90–92 Nisbett, R., 93 Index ■ 221 obfuscation, 5, 94–96, 98–100, 102, 104–106, 108–109, 113, 115–117, 123, 128–129, 153, 165, 186 O’Donoghue, T., 28, 52 Ok, E A., 165, 185 Osborne, M., 93, 146 outside option See default over-confidence, 53, 60, 62, 73 over-optimism, 53–56, 59–60, 62, 68–69, 71–73 rationalization, 25, 37–38, 67, 82, 150–151, 189–199, 204 reference point, 4–5, 11, 24, 127–130, 138–139, 141–147 regulation, 2, 5–7, 52, 72, 83, 104–108, 150, 155, 158–159, 164, 186 Ritov, I., 164 Roberts, J., 91 Rubinstein, A., 3, 8, 29, 93, 108, 124, 146, 200 Rustichini, A., 211, 212 Pagliero, M., 146 partition, perceptual, 110–113, 119–122, 124 paternalism, 20 Peitz, M., 146 Peleg, B., 28 personal equilibrium, 139–142, 145–146 Pesendorfer, W., 42, 146, 211, 212 Phelps, E S., 29 Piccione, M., 124, 165, 200 Plott, C R., 146 Pollak, R A., 29 preferences dynamically inconsistent, 4, 23, 25, 28–30, 33, 53, 169, 184–186 status quo, 147, 165 reference-dependent, 139 revealed, 20, 163, 169, 208 over menus, 37, 168–170, 178, 204, 206–212 price discrimination, 5, 18, 26–27, 50, 52, 71, 115, 117, 124, 185, 187 price dispersion, 80, 149–150, 165 price rigidity, 130–138, 145 product differentiation, 2, 4–5, 7, 77, 84–86, 88, 92–93, 157, 159, 184, 186 protection, consumer See regulation sales, 77, 80, 95, 142, 144, 146 sampling, 5, 77–79, 82–84, 86, 90–94, 96, 100, 103–104, 107–108, 110, 112, 129, 142, 146, 184, 190, 194–196 Samuelson, W F., 164 Sandroni, A., 73 Sarver, T., 212 Schmeidler, D., Schotter, A., 197 screening, 18–19, 22, 27–28, 44, 46, 48, 59, 70–71, 73, 148, 187 search, 26, 78, 80, 96, 108–109, 150–151, 165–166, 196 self-control, 4, 30, 36–46, 204–205, 210–212 Shafir, E., 164 Simon, H., Smallwood, D E., 92 sophistication, 13–15, 17–35, 37–39, 41–50, 52, 58–60, 63–66, 115–119, 122, 124, 184–185 Spiegler, R., 29, 52, 73, 92, 108, 146, 165, 179, 180, 201 Spinnewijn, J., 73 Squintani, F., 73 Stahl, D O., 109 Stewart, N., 93 Strotz, R., 28 Sugden, R., 146 Sundararajan, A., 93 Sunstein, C R., 8, 164 switching, 14, 27, 46, 127, 147, 159–160, 164–165, 178, 183 Szech, N., 93 Rabin, M., 8, 28, 52, 124, 146, 201 Radner, R., 93 randomization, 95, 98, 103, 141–143, 145 222 ■ Index tariff, three-part, 7, 54, 61–62, 73, 183 tariff, two-part, 30–34, 39, 42, 59–60, 183–184 temptation, 4–5, 12–13, 27–28, 36, 38, 40–41, 46, 210–212 temptation utility, 37, 40–41, 207–209, 211 Thaler, R H., 7, 8, 146, 164 Thesmar, D., 73 Tirole, J., 92 Todd, P M., 164 trade, speculative, 18, 30, 41–42, 50–52, 58, 68, 70, 184–186 Tversky, A., 7, 93, 146, 164 Varian, H R., 164 Vickers, J., 164 unawareness, 1, 5, 22, 54, 62–67, 100–111, 183 Uthemann, A., 73 Zeckhauser, R., 164 Zeiler, K., 146 Zhou, J., 146, 164, 165 welfare analysis, 4–5, 20, 33, 34, 78, 82, 100–101, 169–170 Whinston, M D., 98, 102 Wilson, C M., 108 Wolitzky, A., 108, 109 Yaari, M., 28 Yin, W., 29 ...■ Bounded Rationality and Industrial Organization This page intentionally left blank Bounded Rationality and Industrial Organization Ran Spiegler 3 Oxford University... Cataloging-in-Publication Data Spiegler, Ran Bounded rationality and industrial organization / Ran Spiegler p cm Includes bibliographical references and index ISBN 978-0-19-539871-7 (cloth : alk... got me “hooked” on the subject of bounded rationality fifteen years ago, and I have continued to benefit from his work and his thoughts ever since Ayala Arad and Yves Guéron have provided truly