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Summer 2003 AMA Doctoral Consortium 1 Bounded Rationality in Markets (1)
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Summer 2003 AMA Doctoral Consortium 2 Bounded Rationality in Markets (2)
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Summer 2003 AMA Doctoral Consortium 3 Example: Design of Distribution Contract
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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) ?
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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
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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
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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
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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
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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
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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
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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!"
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