1. Summer 2003 AMA Doctoral Consortium 1 Bounded Rationality in Markets (1)

2. Summer 2003 AMA Doctoral Consortium 2 Bounded Rationality in Markets (2)

3. Summer 2003 AMA Doctoral Consortium 3 Example: Design of Distribution Contract

4. Summer 2003 AMA Doctoral Consortium 4 Integrated versus Independent Channels Integrated Independent Manufacturer Retailer Demand = 10 - price C = 2 Price(Integrated)? W (Integrated)? Manufacturer Retailer Demand = 10 - price C = 2 Price(Independent) ? W (Independent) ?

5. Summer 2003 AMA Doctoral Consortium 5 Double Marginalization Problem Manufacturer Retailer Demand = 10 - Price C = 2 Price(Integrated) = 6 W (Integrated) = 2 Manufacturer Retailer Demand = 10 - Price C = 2 Price(Independent) = 8 W (Independent) = 6  Price (Integrated) = 6 < Price (Independent) = 8  Total Profit (Integrated) = 16 > Total Profit (Independent) = 12

6. Summer 2003 AMA Doctoral Consortium 6 Solution to Double Marginalization Problem: Two-Part Tariff (TPT) Manufacturer Retailer Demand = 10 - Price C= 2 Price (TPT) = 6 F, W (TPT) = 2  Price (TPT) = Price (Integrated) = 6 < Price (Independent) = 8  Total Profit (Integrated) = Total Profit (TPT) = 16 > Total Profit (Independent) = 12 Manufacturer Retailer Demand = 10 - Price C = 2 Price(Independent) = 8 W (Independent) = 6

7. Summer 2003 AMA Doctoral Consortium 7 Standard Theory and Experimental Results Theory INDEP W Data INDEP W Data INDEP TPT Theory INDEP TPT W65.474.142 Price87.746.946 Total Profit1212.4814.6816 No Difference Significant Differences

8. Summer 2003 AMA Doctoral Consortium 8 Loss Aversion and Mental Accounting  Up-front payment (F) and variable payment (w x Demand) are kept in two separate mental accounts.  F is a loss that is incurred before any sales is realized and at the point where the reference profit is zero.  Variable payment is incurred only after each unit of sales is realized.  $1 of up-front payment is equivalent to $X of variable payment  The value of $X that maximizes the likelihood of observing the data turns out to be $X = 1.5

9. Summer 2003 AMA Doctoral Consortium 9 Theory with Loss Aversion and Experimental Results Theory INDEP W Data INDEP W Data INDEP TPT Theory INDEP TPT – LA Theory INDEP TPT W65.474.144.062 Price87.746.947.036 Total Profit1212.4814.6814.9416 No Difference

10. Summer 2003 AMA Doctoral Consortium 10 Necessary Conditions for Generalization to Games and Markets  Simple and precise alternative  Can be used as a productive tool to generate testable hypotheses in different settings  Explains behaviors better in existing settings  Generate interesting predictions in new market settings

11. Summer 2003 AMA Doctoral Consortium 11 Key Takeaways  This emerging perspective spans traditional boundaries between consumer behavior (CB) and modeling (i.e., psychology and economics)  The goal is help you to answer the question "are you a CB person or a modeler?” with "both!"