Friday, May 18, 2012
Posted by D. Daniel Sokol
Steffen Huck (University College London) and Jidong Zhou (University College London) wrote a report Consumer Behavioural Biases in Competition: A Survey . Highly recommended.
ABSTRACT: Consumer behavioural biases imply that consumers may not behave in the fully rational way that many economic models presume. What impact do these biases have on competition? Specifically, how does competition and pricing change when consumers are biased? Can inefficiencies that arise from consumer behavioural biases be mitigated by lowering barriers to entry? Do biased consumers make rational ones better or worse off? And will biased consumer behaviour be overcome through learning or education?
This report reviews the empirical and theoretical behavioural economic literature to answer these questions. It looks at the key implications for consumer and competition policy in particular to understand how and when competitive equilibrium may change for the worse. It also contributes to our understanding of when, why, and how we should intervene.