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Behavioral Economics as Applied to Firms: A Primer

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  • Mark Armstrong
  • Steffen Huck

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.

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  • Mark Armstrong & Steffen Huck, 2010. "Behavioral Economics as Applied to Firms: A Primer," CESifo Working Paper Series 2937, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2937
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    Keywords

    behavioral economics; firms; oligopoly; bounded rationality; collusion;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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