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Behavioral Economics as Applied to Firms: A Primer

45 Pages Posted: 17 Feb 2010  

Mark Armstrong

University College London - Department of Economics

Steffen Huck

University College London - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: February 2010

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.

Keywords: behavioral economics, firms, oligopoly, bounded rationality, collusion

JEL Classification: D40, L20, L21

Suggested Citation

Armstrong, Mark and Huck, Steffen, Behavioral Economics as Applied to Firms: A Primer (February 2010). CESifo Working Paper Series No. 2937. Available at SSRN: https://ssrn.com/abstract=1553645

Mark Armstrong

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Steffen Huck (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 207 679 5895 (Phone)
+44 207 916 2774 (Fax)

HOME PAGE: http://www.ucl.ac.uk/~uctpshu/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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