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Self-Serving Behavior in Price-Quality Competition

  • Halbheer, Daniel
  • Bertini, Marco
  • Koenigsberg, Oded

Managers like to think well of themselves, and of the firms that employ them. However, positive illusions can bias a manager's evaluation of market outcomes, self-servingly crediting success on the superior quality of one's own product but blaming failure on the aggressive price of a competitor's offering. These distorted attributions stem from the idea that product quality better serves the manager's motivation for self-enhancement and self-presentation than price: product quality is seemingly more central to the firm, less susceptible to external market forces, and more stable over time. We position our theory in the psychology of attribution, define self-serving behavior and provide experimental and survey evidence of this phenomenon, and develop a model of price-quality competition that incorporates the empirical findings. In particular, we first study the natural benchmark equilibrium provided by unbiased decision makers. We then introduce self-serving behavior in the presence of myopic principals, or of forward-looking principals who anticipate the limitations of managers and set first-period decisions accordingly.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79842.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79842
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  1. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May.
  2. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
  3. Todd R. Kaplan & Bradley J. Ruffle, 2004. "The Self-serving Bias and Beliefs about Rationality," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 237-246, April.
  4. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: I. Overview and Nondiscriminatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 1-37, Spring.
  5. Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
  6. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
  7. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
  8. Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988. "Entrepreneurs' perceived chances for success," Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108.
  9. Weiner, Bernard, 2000. " Attributional Thoughts about Consumer Behavior," Journal of Consumer Research, University of Chicago Press, vol. 27(3), pages 382-87, December.
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