developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

the use of risk and return models for multiattribute decisions with decomposable utilities normatively oriented approaches to decision making under uncertainty occupy a major portion of the literature of decision analysis among the proposed approaches the von neumann morgenstern expected utility eu theory has been the most prominent model of rational choice despite some controversies that surround this model with respect to its descriptive ability as well as the plausibility of utility assessment in actual decision situations 6 10 although most applications of the eu model have been concerned with decisions involving monetary outcomes its scope is not limited to any particular class of conse quences the basic appeal of the model is attributable partly to its generality in this regard and more importantly to the apparent reasonableness of its preferentialaxioms in the context of decisions with monetary outcomes several alternatives to the eu model have been proposed including the mean variance and mean semivariance models that have found popularity in the economies and finance litera ture see 4 8 and 9 in contrast to the eu theory where a decision maker s preferences among uncertain prospects are assumed given preferences in these models are formulated in terms of two attributes that are presumed to character ize all available choices in the mean semivariance model for example uncer tain prospects are viewed entirely in terms of their means and below target semivariances a generalization of this model was examined by fishburn 2 who showed that the general mean risk model exhibits a certain degree of compatibility with the eu model more recently holthausen 5 showed that this compatibility is significantly enhanced when mean is replaced by a return measure de fined as a probability weighted function of above target deviations specifically holthausen proved that this model yields the same preferences as the eu model whenever the expected utility function has the form

approximate bertrand equilibria in a replicated industry this paper considers the existence and properties of approximate bertrand equilibria in a replicated industry price setting firms produce a homogeneous product with weakly convex costs the main results are that a given e 0 an e equilibrium exists if the industry is large enough b if the e is small enough and the industry large enough any e equilibrium is approximately competitive these results depend on how contingent demand is specified

a ricardian excursion to bermuda an estimation of mixed strategy equilibrium while there is a rich theoretical literature on mixed strategy equilibria there has long been doubt with regard to the actual prevalence of scuh equilibria the objective of this paper is to empirically demonstrate a mixed strategy equilibrum in a model of ricardian rent generation the oligopolistic resort hotel industry in bermuda is used as the illustrative case

bounded rationality climate risks and insurance is there a market for natural disasters this paper examines the role of insurances to reduce uncertainty associated with climate change losses for individuals of special interest is the value individuals place on the reduction of increased flood risks by insurance coverage using rank dependent utility and prospect theories risk premiums are estimated under different climate change scenarios for the netherlands the study delivers two main insights first estimation results suggest that a profitable flood insurance market could be feasible second climate change has the potential to increase the profitability of offering flood insurance 2009 by the board of regents of the university of wisconsin system

asymmetric price adjustments a supply side approach using a model of dynamic price competition we provide an explanation from the supply side for the well established observation that output prices react faster in response to input cost increases than to decreases when costs decline the opportunity of profitable storing in anticipation of higher future costs allows competitive firms to coordinate on prices above current marginal costs the initial price response is only partial and profitable storing relaxes competition conversely when costs rise storing is not beneficial in anticipation of lower future costs and firms immediately adjust their prices to current marginal costs which entails the standard bertrand outcome our results shed new light on the empirical evidence about asymmetric pricing and can stimulate further empirical investigation on this puzzle

price setting supergames with capacity constraints this paper examines the role of industry capacity in enforcing collusion in the context of repeated games for a fixed capacity per firm it is shown that changes in the number of firms have a non monotone effect on the best enforceable cartel price this is due to the fact that while an additional firm lowers the share that each of the other firms enjoys at the collusive price it also increases the losses to each firm should the cartel fail

a risk return model with risk and return measured as deviations from a target return two attribute risk and return models are very popular in the economics and finance literature for analyzing decisions under uncertainty their popularity stems primarily from the intuitive appeal of the dichotomy into risk and return and from the ease with which the concepts can be diagrammed in two dimensions the most commonly used risk return model is the mean variance model in which risk is measured as the variance and return by the mean of the probability distribution over outcomes the mean variance model has a number of shortcomings which are widely known but of particular concern here are the facts that 1 mean variance dominance is neither necessary nor sufficient for second degree stochastic dominance 2 unless the form of the probability distribution is restricted mean variance is consistent with von neumann morgenstern utility theory only if the utility function is quadratic and 3 as peter fishburn has noted

bertrand edgeworth equilibrium with a large number of firms abstract we examine a model of price competition with strictly convex costs where the firms simultaneously decide on both price and quantity are free to supply less than the quantity demanded and there is discrete pricing if firms are symmetric then for a large class of residual demand functions there is a unique equilibrium in pure strategies whenever for a fixed grid size the number of firms is sufficiently large moreover this equilibrium price is within a grid unit of the competitive price the results go through to a large extent when the firms are asymmetric or they are symmetric but play a two stage game and the tie breaking rule is weakly manipulable

the existence of mixed strategy equilibria in a price setting oligopoly with convex costs this paper shows that a mixed strategy equilibrium will exist in an industry producing a homogeneous product with perfectly informed consumers if firms are identical and have weakly convex costs this generalises an earlier result by dasgupta and maskin

bertrand competition with subcontracting we investigate how the possibility of subsequently subcontracting production to each other influences rivals initial competition for a contract or a market as a two stage game in its first stage the two firms engage in price competition to supply a contract or a market in the second stage the firms may subcontract production to each other it is supposed that the firms produce the identical product with the same strictly convex cost function the incentive for subcontracting comesfrom the strictly convex production costs a firm is obliged to supply the entire quantity demanded at its quoted price our analysis discloses that if the winner of the game s first stage determines the terms of the subcontract in its second stage there exists a unique subgame perfect nash equilibrium spne in pure strategies in which the firms bid the same price in the first stage and both receive zero profits on the other hand if the loser of the game s first stage sets the terms of the subcontract in the second stage there exists a unique spne in pure strategies in which the firms bid the same price in the first stage and both receive positive profits the presence of the possibility of subcontracting supports a unique spne in pure strategies even though no actual subcontracting may occur the spne price is below the socially optimal price in the first case and is above it in the second case we also consider other modes of sharing the gains from subcontracting between the two firms such as the nash bargaining solution

price setting merchants in a simple trade model abstract in lieu of a fictitious walrasian auctioneer price determination in a simple two country two good trade model is explicitly modelled as the strategic price setting behavior of merchants the results depend on the order in which countries are visited and whether or not the supply is backward bending theorem 1 establishes sufficient conditions for the walrasian outcome to be the unique subgame perfect nash equilibrium spne theorem 2 shows when the unique spne is non walrasian

price competition in a capacity constrained duopoly abstract this paper characterizes the set of nash equilibria in a model of price setting duopoly in which each firm has limited capacity and demand is continuous and decreasing in general there is a unique equilibrium so that comparative static exercises are meaningful the properties of the equilibrium conform with a number of stylized facts the equilibrium prices are lower the smaller is demand relative to capacity when demand is in an intermediate range the firms use mixed strategies they randomly hold sales if capacities are chosen simultaneously before prices the set of equilibrium capacities coincides with the set of cournot quantities

banking competition and market efficiency this paper analyses competition among financial intermediaries in a set up where financial intermediaries economize on duplicated monitoring diamond 1984 we analyse two different games in which both direct trade and indirect trade are available we show that in general equilibrium outcomes are inefficient so that diamond s efficiency result is fragile intermediation may increase rather than decrease transaction costs disintermediation may also be an equilibrium we discuss the role played by the nonconvexities of banks technology and that played by competition for deposits and loans

consumer choice and cournot behavior in capacity constrained duopoly competition in a two stage model of duopolistic capacity choice and subsequent price competition consumer switching costs can deter some consumers from seeking service at a low price firm that lacks sufficient capacity to serve the entire market in this setting firms residual demand functions are aggregatedfrom thefirm selection decisions of individual consumers based on firms prices and their induced degrees of service reliability if consumers are approximately risk neutral with respect to service reliability then capacity constrained duopoly competition has a unique subgame perfect equilibrium in which firms choose cournot capacities and prices the equilibrium robustness of cournot behavior extends to duopoly markets in which consumer switching costs are induced by subscription pricing