Behavioral economics as applied to firms: a primer.

Working paper

In recent years there has been a good deal of research investigating how poor or non-standard decision making by consumers might affect market outcomes. In much of this work, the assumption is that firms are fully rational and aim to maximize their profits (and sometimes they do this by exploiting the behavioral biases of consumers). Some of this work points to situations where there is a role for policy which protects consumers from their own failings and from exploitative firms. In this article we focus instead on non-standard approaches to firm behavior. Consumers are kept in the background, and are present merely to generate in some fashion a demand curve for the firms' products. We present evidence—both real world and experimental—that firms (or experimental subjects playing the role of firms) sometimes depart from the profit-maximizing paradigm.

Authors: Armstrong, M; Huck, S

• Publisher: OFT
• Series: OFT Economic Discussion Papers
• Publication date: 2010-03-01
• Language: English