the market for quacks a group of n quacks plays a price competition game facing a continuum of patients who recover with probability whether or not they acquire a quack s treatment if patients chose rationally the market would be inactive i assume however that patients choose according to a boundedly rational procedure which re ects anecdotal reasoning this element of bounded rationality has signi cant

unawareness and selective disclosure the effect of school quality information on property prices the australian government launched the my school website in 2010 to provide standardised information about the quality of schools to the australian public this paper combines data from this website with home sales data for the state of victoria to estimate the effect of the publication of school quality information on property prices we use a difference in difference approach to estimate the causal effect of the release of information about high quality and low quality schools relative to medium quality schools in the neighborhood and find that the release of information about high quality schools increases property prices by 3 6 percent whereas the release of information about low quality schools has no significant effect the findings indicate that many buyers are unaware of the relevance of school quality information and that real estate agents pursue a strategy of disclosing information about high quality schools to increase the sales price results from a survey of victorian real estate agents provide evidence in favor of this strategy

experts and quacks what happens when type is endogenous in a reputational setting here customers cannot tell experts from imitative quacks but gain information through repeated interaction firm incentives to invest in expertise vary nonmonotonically in how tolerant customers are of bad outcomes more tolerant customers are both more forgiving making expertise less necessary and longer tenured increasing the value of retaining them in equilibrium the proportion of expert firms is bounded away from one some quacks are necessary to keep incentives of experts in line the fraction of experts is decreasing in customers switching costs and the relative cost of expertise over quackery

the proportional shapley value and applications abstract we study a non linear weighted shapley value shapley 1953b for cooperative games with transferable utility in which the weights are endogenously given by the players stand alone worths we call it the proportional shapley value since it distributes the harsanyi dividend harsanyi 1959 of all coalitions in proportion to the stand alone worths of its members we show that this value recommends appealing payoff distributions in several applications among which a land production economy introduced in shapley and shubik 1967 although the proportional shapley value does not satisfy the classical axioms of linearity and consistency hart and mas colell 1989 the main results provide comparable axiomatic characterizations of our value and the shapley value by means of weak versions of these two axioms these characterizations rely on another result which states that there exists a unique extension of a value defined on games that are additive except possibly for the grand coalition to the set of all games in the much larger class we consider moreover our value inherits several well known properties of the weighted shapley values

price competition under limited comparability this paper studies market competition when firms can influence consumers ability to compare market alternatives through their choice of price formats we introduce random graphs as a tool for modelling limited comparability of formats our main results concern the interaction between firms equilibrium price and format decisions and its implications for industry profits and consumer switching rates we show that narrow regulatory interventions that aim to facilitate comparisons may have adverse consequences for consumer welfare finally we argue that our limited comparability approach provides a new perspective into the phenomenon of product differentiation

modeling the economic interaction of agents with diverse abilities to recognize equilibrium patterns we model differences among agents in their ability to recognize temporal patterns of prices using the concept of debruijn sequences in two dynamic models of markets we demonstrate the existence of equilibria in which prices fluctuate in a pattern that is independent of the fundamentals and that can be recognized only by the more competent agents jel c7 d4 s477

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

equilibrium with product differentiation tive consumer formulations is used to examine the properties of single and multiple price equilibria conditions under which decreases in the intensity of consumer preferences reduce price are given it is shown that with certain types of demand curves entry can eliminate price cost markups even given product differentiation if competition is localized it is demonstrated that entry does not affect the markup finally the effect of spurious product differentiation on price is examined

optimal pricing against a simple learning rule abstract the paper studies a repeated buyer seller relationship under asymmetric information instead of assuming game theoretic rationality it is assumed that the buyer uses a nonstrategic learning rule to update his beliefs the seller s optimal pricing policies against this rule are analyzed it is shown that screening behavior emerges as a result of the seller s long run optimization problem although this is not a nash equilibrium of the one shot game moreover despite its apparent naivete the simple rule is optimal for the buyer in the sense that the seller cannot extract more from the buyer than the value of the stream of goods delivered

can higher prices stimulate product use evidence from a field experiment in zambia the controversy over how much to charge for health products in the developing world rests in part on whether higher prices can increase use either by targeting distribution to high use households a screening effect or by stimulating use psychologically through a sunk cost effect we develop a methodology for separating these two effects we implement the methodology in a field experiment in zambia using door to door marketing of a home water purification solution we find evidence of economically important screening effects by contrast we find no consistent evidence of sunk cost effects jel c93 d12 i11 m31 o12

word of mouth communication and social learning this paper studies the way that word of mouth communication aggregates the information of individual agents we find that the structure of the communication process determines whether all agents end up making identical choices with less communication making this conformity more likely despite the players naive decision rules and the stochastic decision environment word of mouth communication may lead all players to adopt the action that is on average superior these socially efficient outcomes tend to occur when each agent samples only a few others i introduction economic agents must often make decisions without knowing the costs and benefits of the possible choices given the frequency with which such situations arise it is understandable that agents often choose not to perform studies or experiments but instead rely on whatever information they have obtained via casual word of mouth communication reliance on this sort of easily obtained information appears to be common in circumstances ranging from consumers choosing restaurants or auto mechanics to business managers evaluating alternative organizational structures this paper studies two related environments in arguing that individuals reliance on word of mouth communication has interesting implications for their aggregate behavior first motivated by the diffusion of new technologies we consider a choice between two competing products with unequal qualities or payoffs and show that the structure of communication is important in determining whether the population as a whole is likely to learn to use the superior product second we consider a choice between two products or practices that are equally good and ask whether consumers are likely to herd onto a single choice or whether diversity will obtain even in the long run we explore the implications of word of mouth communication in a simple nonstrategic environment there is a large population of identical players each of whom repeatedly chooses between two possible actions each player s payoff is determined by his own

equilibrium price distributions equilibrium price distributions for a homogeneous product consistent with individual incentives are investigated they arise in informationally imperfect markets in which the only primitive datum is the distribution of search costs it is shown that single multi and continuous price distributions are all viable long run phenomena depending on the nature of search costs a method for computing equilibrium price distributions is also provided jevons law of one price has long been an accepted dictum in economic theory in a classroom presentation it still serves sometimes implicitly as a major premise in many micro models of market interaction much of the descriptive theory as well as welfare analysis hinges on this assumption yet one s day to day experience reveals that price differentials are a viable phenomenon and that looking for lower prices may very well be a rewarding activity the prospects of eventually hitting a bargain and the resulting price reduction would more than compensate for the cost incurred during the search process moreover the existence of price dispersions appear to be an empirically stable phenomenon snapshots of markets for relatively homogeneous products reveal substantial and recurring price differentials stigler 1961 and pratt wise and zeckhauser 1979 for example report some evidence supporting this claim an important article by stigler 1961 focused economists attention on the crucial role played by the informational structure of markets it gave rise to the study of the

complexity considerations and market behavior the article is concerned with market behavior when firms have limited ability to handle effectively the complexity of changing market conditions and strategic interaction modelling the managerial bounded rationality by using the concept of strategic complexity as measured by afinite automaton we show that market behavior can be considerably altered once there is a limit on the complexity ofstrategies in particular we demonstrate that when an incumbent firm operates in several markets an entry to one market may induce the incumbent to exit from another market divestiture in order to concentrate on the competition it faces for different parameters the incumbent may react to such an entry by exit from the same market creating specialization we also demonstrate that bounded complexity can serve as an entry barrier giving an advantage to the established incumbent firm

prices as signals of product quality this paper is concerned with the provision of quality in markets in which consumers have only imperfect information the analysis focuses on a market for a product that can be produced at different quality levels all consumers prefer higher to lower quality but they may differ in their willingness to pay for quality producers can produce any quality they like but higher qualities are more costly to produce the information in this market is imperfect in the sense that the exact quality chosen by a firm is known only to the firm itself some information about the quality of a firm s product will however reach its potential customers even if they do not make any special effort to acquire it within the framework suggested here two conclusions are drawn first prices may serve as signals which exactly differentiate the available quality levels that is there exists a fulfilledexpectations equilibrium at which each price signals a unique quality level second the pricesignals are not arbitrary each price signal exceeds the marginal cost of producing the quality it signals such a mark up depends on the nature of the product specific information received by consumers the poorer the information the higher the mark up

inferior products and profitable deception we analyse conditions facilitating profitable deception in a simple model of a competitive retail market firms selling homogenous products set anticipated prices that consumers understand and additional prices that naive consumers ignore unless revealed to them by a firm where we assume that there is a binding floor on the anticipated prices our main results establish that bad products those with lower social surplus than an alternative tend to be more reliably profitable than good products specifically 1 in a market with a single socially valuable product and sufficiently many firms a deceptive equilibrium in which firms hide additional prices does not exist and firms make zero profits but perversely 2 if the product is socially wasteful then a profitable deceptive equilibrium always exists furthermore 3 in a market with multiple products since a superior product both diverts sophisticated consumers and renders an inferior product socially wasteful in comparison it guarantees that firms can profitably sell the inferior product by deceiving consumers we apply our framework to the mutual fund and credit card markets arguing that it explains a number of empirical findings regarding these industries

consideration sets and competitive marketing we present a model of competitive marketing based on the notion that consumers are boundedly rational and that firms use marketing tactics in an attempt to influence consumers decision process the standard model of consumer behaviour assumes that the consumer applies well defined preferences to a perfectly perceived set of available alternatives we retain the assumption that consumers have stable preferences but relax the assumption that they have a perfect perception of what is relevant for their consumption problem thus allowing firms to manipulate that perception our aim is to explore the market implications of this departure from the standard model especially for the way firms deploy marketing strategies in competitive environments the cornerstone of our model is the observation that in the modern marketplace consumers face an overwhelmingly large variety of products and therefore often use screening criteria deliberate as well as unconscious in order to reduce the number of relevant alternatives as a result consumers apply their preferences not to the set of objectively feasible alternatives but to a potentially smaller set which they construct at an earlier stage of the decision process borrowing a term from the marketing literature we refer to this set as the consideration set the basic idea underlying this term is that consumers may be unaware of some of the feasible products and even when they become aware of a new product they still need to be persuaded to consider it as a potential substitute to their currently consumed product

sell probabilistic goods a behavioral explanation for opaque selling probabilistic or opaque selling whereby a seller hides the exact identity of a product until after the buyer makes a payment has been used in practice and received considerable attention in the literature under what conditions and why is probabilistic selling attractive to firms the extant literature has offered the following explanations to price discriminate heterogeneous consumers to reduce supply demand mismatches and to soften price competition in this paper we provide a new explanation to exploit consumer bounded rationality in the sense of anecdotal reasoning we build a simple model where the firm is a monopoly consumers are homogeneous and there is no demand uncertainty or capacity constraint this model allows us to isolate the impact of consumer bounded rationality on the adoption of opaque selling we find that although it is never optimal to use opaque selling when consumers have rational expectations it can be optimal when consumers are boundedly rational we show that opaque selling may soften price competition and increase the industry profits as a result of consumer bounded rationality our findings underscore the importance of consumer bounded rationality and show that opaque selling might be even more attractive than previously thought

gaming performance fees by portfolio managers we show that it is very difficult to devise performance based compensation contracts that reward portfolio managers who generate excess returns while screening out managers who cannot generate such returns theoretical bounds are derived on the amount of fee manipulation that is possible under various performance contracts we show that recent proposals to reform compensation practices such as postponing bonuses and instituting clawback provisions will not eliminate opportunities to game the system unless accompanied by transparency in managers positions and strategies indeed there exists no compensation mechanism that separates skilled from unskilled managers solely on the basis of their returns histories

manipulation and the allocational role of prices it is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources this paper identifies a limitation inherent in this role of prices it shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm s stock when this happens the informativeness of the stock price decreases and the beneficial allocational role of the financial market weakens the trader profits from this trading strategy partly because his trading distorts the firm s investment we therefore refer to this strategy as manipulation we show that trading without information is profitable only with sell orders driving a wedge between the allocational implications of buyer and seller initiated speculation and providing justification for restrictions on short sales

games with procedurally rational players the authors study interactive situations in which players are boundedly rational each player rather than optimizing given a belief about the other players behavior as in the theory of nash equilibrium uses the following choice procedure she first associates one consequence with each of her actions by sampling literally or virtually each of her actions once then she chooses the action that has the best consequence the authors define a notion of equilibrium for such situations and study its properties copyright 1998 by american economic association

expectation based loss aversion and strategic interaction abstract by extending the equilibrium concepts of k szegi and rabin 2006 k szegi and rabin 2007 this paper analyzes the strategic interaction of expectation based loss averse players for loss averse players with choice acclimating expectations the utility from playing a mixed strategy is not linear but convex in the probabilities they assign to their pure strategies as a consequence they are generally unwilling to randomize and an equilibrium may fail to exist for players with choice unacclimating expectations by contrast randomizing over their pure strategies may indeed constitute a credible best response and an equilibrium always exists building upon these insights we delineate how expectation based loss averse players differ in their strategic behavior from their counterparts with standard expected utility preferences derive novel strategic effects discuss equilibrium selection and derive equilibrium play for some simple games

modelling cognitively bounded rationality an evaluative taxonomy abstract since its origins in the 1950s the notion of bounded rationality has been incorporated into economic theory using an array of methodological approaches this paper presents a taxonomy by which these approaches can be categorized and understood evaluating each approach against a range of important criteria at a time when the foundations of economic theory are being re examined this paper should be viewed as a first step towards an assessment of the appropriate role that this more realistic view of cognition should take in different areas of economic theory and also of the desirable characteristics of models that incorporate it

testing threats in repeated games under most game theoretic solution concepts equilibrium beliefs are justified by off equilibrium events i propose an equilibrium concept for infinitely repeated games called nash equilibrium with tests newt according to which players can only justify their equilibrium beliefs with events that take place on the equilibrium path itself in newt players test every threat that rationalizes a future non myopic action that they take the tests are an integral part of equilibrium behavior characterization of equilibrium outcomes departs from the classical folk theorems the concept provides new insights into the impact of self enforcement norms such as reciprocity on long run cooperation c 2004 elsevier inc all rights reserved

relying on the information of interested parties we investigate the conventional wisdom that competition among interested parties attempting to influence a decisionmaker by providing verifiable information elicits all relevant information we find that if the decisionmaker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties competition may be unnecessary to achieve this result if the decisionmaker is unsophisticated or not well informed competition is not generally sufficient if the interested parties interests are sufficiently opposed however or if the decisionmaker is seeking to advance the parties welfare then competition can reduce or even eliminate the decisionmaker s need for prior knowledge about the relevant variables and for strategic sophistication in other settings only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow effective decisionmaking

sampling equilibrium with an application to strategic voting we suggest an equilibrium concept for a strategic model with a large number of players in which each player observes the actions of only a small number of the other players the concept fits well situations in which each player treats his sample as a prediction of the distribution of actions in the entire population and responds optimally to this prediction we apply the concept to a strategic voting model and investigate the conditions under which a centrist candidate can win the popular vote although his strength in the population is smaller than the strengths of the right and left candidates

on price recognition and computational complexity in a monopolistic model a single seller of an indivisible good operates in a market with many consumers who differ in their ability to process information the consumers constraints are modeled in two submodels the first in terms of the limits on the number of sets in the partition of the price space and the second in terms of the limits on the complexity of the operation he can use to process a price offer for the construction of the second submodel the tool of a perceptron is borrowed from the parallel computation literature assuming a negative correlation between the seller s cost of supply of the good and the consumer s ability to process information i demonstrate that the heterogeneity of consumer s abilities can be used by the seller to profitably discriminate among them