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date: 17 October 2018

Abstract and Keywords

This survey chapter discusses nonstandard, or “behavioral,” approaches to firm behavior. It presents evidence that firms (or experimental subjects playing the role of firms) sometimes depart from the profit-maximizing paradigm. Section 9.2 discusses the related issues of imitative behavior by firms and concerns for relative (not absolute) profit, which can make an oligopolistic market more competitive than the orthodox theory suggests. Other forms of social preferences—a desire for vengeance if a rival cheats on a collusive agreement, say—are presented in section 9.3, which argues that they may help sustain collusive agreements. Various kinds of satisficing behavior are discussed in section 9.4, which shows how imperfectly optimizing firms may end up with greater profits than their profit-maximizing counterparts. Section 9.5 discusses the impact of overoptimism by entrepreneurs and managers, the imitation of irrational behavior by profit-maximizing firms, and the benefits of including fixed costs in pricing decisions.

Keywords: behavioral economics, antitrust, collusive agreements, imitative behavior, satisficing

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