Final Report Summary - BRIO (Bounded Rationality in Industrial Organization)
The original grant proposal had three major objectives. I describe the project's major achievement in light of these objectives.
Competitive framing. The original proposal aimed to provide a framework for modeling the interplay between competitive forces and firms' manipulation of consumer choice via "framing effects", and to use this "competitive framing" framework to generate new insights and applications. This objective was met in a series of four major papers: Eliaz and Spiegler (2011a,b), Piccione and Spiegler (2012) and Spiegler (2014a). The framework incorporates the "choices with frames" model due to Salant and Rubinstein (2008) and bernheim and Rangel (2009) into a market-competition setting: firms simultaneously choose payoff-relevant aspects of their products (price, quality, etc.) as well as "marketing messages" that stochastically influence consumers' "frame", which in turn affects consumer choice. The framework provides a language for parsimonious reformulation of existing behavioral IO models and invention of new ones, and enables the articulation of new useful concepts. For instance, Piccione and Spiegler (2012) and Spiegler (2014a) identified a theoretical property called "weighted regularity", which means that each firm can unilaterally enforce a probability distribution over the consumer's frame. This property holds in many relevant examples, and it has implications that greatly facilitate equilibrium analysis. Piccione and Spiegler (2012) demonstrate its usefulness in a market model in which two firms choose prices and "description formats" that determine the probability that consumers make a price comparison. Many relevant distinctions in positive and normative analysis of market equilibrium ("competitiveness" of industry profits, comparative statics, correlation between prices and comparability, response to regulatory interventions such as "harmonization of formats" or "default architecture") turn out to hinge on weighted regularity. Eliaz and Spiegler (2011a,b) use a subclass of models in which the consumer's frame consists of his "consideration set", and propose to interpret empirically observed "conversion rates" in terms of underlying unobservable characteristics of the consumer (in particular his "susceptibility to marketing").
Textbook on behavioral IO. In 2011, I published a graduate-level textbook on "bounded rationality and industrial organization", which synthesizes and extends large parts of the behavioral IO literature. Part I analyzes consumers with limited ability to anticipate future preferences, and its implications for monopolistic and competitive dynamic contracting. Part II deals with market complexity, the methods consumers use to cope with it, and firms' endogenous contribution to it as part of their competitive strategy. Part III deals with reference-dependent consumer behavior (default bias, loss aversion). Part IV summarizes the economic implications of these models, and novel methodological considerations. I believe this textbook has helped moving the behavioral IO literature forward, thanks to its pedagogical reformulation and synthesis of existing works. It also led to new results, some of which appeared in new papers: Spiegler (2011), Spiegler (2012a,b) and Eliaz and Spiegler (2013a). Economists have been using parts of the textbook in graduate courses on industrial organization and behavioral economics; and professional economists at regulatory agencies (such as FCA and CMA in the UK) have been actively exposed to it.
Reference dependence in labor markets. Eliaz and Spiegler (2013b) presented a search-matching model of the labor market over the business cycle, in which workers exhibit reference dependence in the following sense: when a worker's current-period wage falls below his previous-period expectation, his morale drops and he becomes less productive. This idea has a long pedigree in the economics literature, but Eliaz and Spiegler (2013b) is the first attempt to formalize it in the context of a modern search-matching model with a business cycle. Our model generates interesting and realistic patterns of wage and employment fluctuations, and creates scope for analyzing richer aspects of labor relations over the business cycle (documented by Bewley (1999) but never modeled by economists).
Competitive framing. The original proposal aimed to provide a framework for modeling the interplay between competitive forces and firms' manipulation of consumer choice via "framing effects", and to use this "competitive framing" framework to generate new insights and applications. This objective was met in a series of four major papers: Eliaz and Spiegler (2011a,b), Piccione and Spiegler (2012) and Spiegler (2014a). The framework incorporates the "choices with frames" model due to Salant and Rubinstein (2008) and bernheim and Rangel (2009) into a market-competition setting: firms simultaneously choose payoff-relevant aspects of their products (price, quality, etc.) as well as "marketing messages" that stochastically influence consumers' "frame", which in turn affects consumer choice. The framework provides a language for parsimonious reformulation of existing behavioral IO models and invention of new ones, and enables the articulation of new useful concepts. For instance, Piccione and Spiegler (2012) and Spiegler (2014a) identified a theoretical property called "weighted regularity", which means that each firm can unilaterally enforce a probability distribution over the consumer's frame. This property holds in many relevant examples, and it has implications that greatly facilitate equilibrium analysis. Piccione and Spiegler (2012) demonstrate its usefulness in a market model in which two firms choose prices and "description formats" that determine the probability that consumers make a price comparison. Many relevant distinctions in positive and normative analysis of market equilibrium ("competitiveness" of industry profits, comparative statics, correlation between prices and comparability, response to regulatory interventions such as "harmonization of formats" or "default architecture") turn out to hinge on weighted regularity. Eliaz and Spiegler (2011a,b) use a subclass of models in which the consumer's frame consists of his "consideration set", and propose to interpret empirically observed "conversion rates" in terms of underlying unobservable characteristics of the consumer (in particular his "susceptibility to marketing").
Textbook on behavioral IO. In 2011, I published a graduate-level textbook on "bounded rationality and industrial organization", which synthesizes and extends large parts of the behavioral IO literature. Part I analyzes consumers with limited ability to anticipate future preferences, and its implications for monopolistic and competitive dynamic contracting. Part II deals with market complexity, the methods consumers use to cope with it, and firms' endogenous contribution to it as part of their competitive strategy. Part III deals with reference-dependent consumer behavior (default bias, loss aversion). Part IV summarizes the economic implications of these models, and novel methodological considerations. I believe this textbook has helped moving the behavioral IO literature forward, thanks to its pedagogical reformulation and synthesis of existing works. It also led to new results, some of which appeared in new papers: Spiegler (2011), Spiegler (2012a,b) and Eliaz and Spiegler (2013a). Economists have been using parts of the textbook in graduate courses on industrial organization and behavioral economics; and professional economists at regulatory agencies (such as FCA and CMA in the UK) have been actively exposed to it.
Reference dependence in labor markets. Eliaz and Spiegler (2013b) presented a search-matching model of the labor market over the business cycle, in which workers exhibit reference dependence in the following sense: when a worker's current-period wage falls below his previous-period expectation, his morale drops and he becomes less productive. This idea has a long pedigree in the economics literature, but Eliaz and Spiegler (2013b) is the first attempt to formalize it in the context of a modern search-matching model with a business cycle. Our model generates interesting and realistic patterns of wage and employment fluctuations, and creates scope for analyzing richer aspects of labor relations over the business cycle (documented by Bewley (1999) but never modeled by economists).