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Behavioral Economics as Applied to Firms: A PrimerMark ArmstrongUniversity College London - Department of Economics Steffen HuckUniversity College London - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA) February 2010 CESifo Working Paper Series No. 2937 Abstract: 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.
Number of Pages in PDF File: 45 Keywords: behavioral economics, firms, oligopoly, bounded rationality, collusion JEL Classification: D40, L20, L21 working papers seriesDate posted: February 17, 2010Suggested CitationContact Information
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