Essays on behavioral industrial organization and welfare/ Priyanka Kothari

Thesis (Ph.D.) - Indian Statistical Institute, 2020

Includes bibliography

Introduction -- Monopoly and the other: Reference-dependence in vertically differentiated markets -- Fairness is flexible: A study of competing focal points -- Happiness in the finite: Oligopoly maximizes welfare

Guided by Prof. Prabal Roy Chowdhury

Many traits of economic agents are well studied and understood by psychologists that are yet to be captured by economic theory. This thesis, in the field of behavioral economics, is yet another attempt at unifying the different approaches of the two well-established disciplines - we ask what does economics predict of the behavior of economic agents ... once the psychology behind their decisions is accounted for. In a nutshell, this thesis is about the implications of choice-making among available alternatives.
We begin with the idea that an economic agent only derives satisfaction from what he consumes without worrying at all (let alone too much) about what he does not. This idea has been contested by celebrated psychologists like Barry Schwartz who argue that if what is bought falls below expectations, then the nagging thought about a potentially better alternative that was not purchased, takes away from the utility from consuming/using what was bought. This idea is being researched by economists, who also found that consumer benchmark is context-dependent. The use of default options (Park et al, 2000, and Johnson et al, 2002), historical values (Klein and Oglethorpe, 1987), expectations (Song, 2012), and anchoring (Chapman and Johnson, 1999 and Strack and Mussweiler, 1997) by consumer are sometimes to simplify their decision making process. The effect of these comparisons is not limited to the consumer choices, for they also influence firms' strategic decisions (Zhou, 2011; Heidhues and Kőszegi, 2005; Heidhues and Kőszegi, 2008 and Spiegler, 2012). In fact, with durable goods the negative effect due to comparison is magnified - every time a commodity is used, an agent is reminded that he could have made a better choice. While we take up the implications of this discussion more elaborately in the final chapter of this thesis (Chapter 4) in a welfare-framework, for now it is important to note that consumers frequently compare what they buy with what they do not - particularly when there are reasons to believe that the latter is better. This is the central theme of Chapter 2 of the thesis.