Satisficing and Prior‐Free Optimality in Price Competition

14 Pages Posted: 19 Apr 2012

See all articles by Werner Guth

Werner Guth

Max Planck Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Maria Vittoria Levati

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics; University of Verona - Department of Economics

Matteo Ploner

University of Trento

Date Written: April 2012

Abstract

We apply a model of satisficing to oligopoly markets with price competition. Sellers have profit aspirations reflecting their conjectures about their competitors' behavior and search for a price guaranteeing these aspirations. Because it seems implausible that people have detailed priors on the others' actions, we postulate that sellers entertain multiple conjectures to which no probabilities can be assigned. This allows us to propose a theory of “prior‐free” optimality and to examine experimentally whether people comply with it. We find that decision makers have difficulties in making prior‐free optimal choices. Most are content to just satisfice, although ways to aspire to more ambitious profits were obviously available.

JEL Classification: C92, C72, D43

Suggested Citation

Güth, Werner and Levati, Maria Vittoria and Ploner, Matteo, Satisficing and Prior‐Free Optimality in Price Competition (April 2012). Economic Inquiry, Vol. 50, Issue 2, pp. 470-483, 2012. Available at SSRN: https://ssrn.com/abstract=2042376 or http://dx.doi.org/10.1111/j.1465-7295.2010.00365.x

Werner Güth (Contact Author)

Max Planck Institute of Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Maria Vittoria Levati

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 19
37129 Verona
Italy

Matteo Ploner

University of Trento ( email )

Via Giuseppe Verdi 26
Trento, Trento 38152
Italy

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