An experimental study of adaptive behavior in an oligopolistic market game

We consider an oligopolistic market game, in which the players are competing firm in the same market of a homogeneous consumption good. The consumer side is represented by a fixed demand function. The firms decide how much to produce of a perishable consumption good, and they decide upon a number of information signals to be sent into the population in order to attract customers. Due to the minimal information provided, the players do not have a well--specified model of their environment. Our main objective is to characterize the adaptive behavior of the players in such a situation.Market game, oligopoly, adaptive behavior, learning, Leex

Understanding Behavioral Antitrust

Behavioral antitrust – the application to antitrust analysis of empirical evidence of robust behavioral deviations from strict rationality – is increasingly popular and hotly debated by legal scholars and the enforcement agencies alike. This Article shows, however, that both proponents and opponents of behavioral antitrust frequently and fundamentally misconstrue its methodology, treating concrete empirical phenomena as if they were broad hypothetical assumptions. Because of this fundamental methodological error, scholars often make three classes of mistakes in behavioral antitrust analyses: First, they fail to appreciate the variability and heterogeneity of behavioral phenomena; second, they disregard the concrete ways in which markets, firms, and other institutions both facilitate and inhibit rational behavior by antitrust actors; and, third, they erroneously equate all deviations from standard rationality with harm to competition. After establishing the central role of rationality assumptions in present-day antitrust and reviewing illustrative behavioral analyses across the field – from horizontal and vertical restraints, through monopolization, to merger enforcement practices – the Article examines the three classes of mistakes, their manifestation, and their consequences in antitrust scholarship. It concludes by offering two sets of essential lessons that the behavioral approach already can offer to make antitrust law and policy more realistic and effective in protecting competition: One concerning the value of case-specific evidence in antitrust adjudication and enforcement, the other showing how antitrust law can and should account for systematic and predictable boundedly rational behavior that is neither constant nor uniform

Understanding Behavioral Antitrust

Behavioral antitrust – the application to antitrust analysis of empirical evidence of robust behavioral deviations from strict rationality – is increasingly popular and hotly debated by legal scholars and the enforcement agencies alike. This Article shows, however, that both proponents and opponents of behavioral antitrust frequently and fundamentally misconstrue its methodology, treating concrete empirical phenomena as if they were broad hypothetical assumptions. Because of this fundamental methodological error, scholars often make three classes of mistakes in behavioral antitrust analyses: First, they fail to appreciate the variability and heterogeneity of behavioral phenomena; second, they disregard the concrete ways in which markets, firms, and other institutions both facilitate and inhibit rational behavior by antitrust actors; and, third, they erroneously equate all deviations from standard rationality with harm to competition. After establishing the central role of rationality assumptions in present-day antitrust and reviewing illustrative behavioral analyses across the field – from horizontal and vertical restraints, through monopolization, to merger enforcement practices – the Article examines the three classes of mistakes, their manifestation, and their consequences in antitrust scholarship. It concludes by offering two sets of essential lessons that the behavioral approach already can offer to make antitrust law and policy more realistic and effective in protecting competition: One concerning the value of case-specific evidence in antitrust adjudication and enforcement, the other showing how antitrust law can and should account for systematic and predictable boundedly rational behavior that is neither constant nor uniform

A Notion of Prominence for Games with Natural-Language Labels

We study games with natural-language labels (i.e., strategic problems where options are denoted by words), for which we propose and test a measurable characterization of prominence. We assume that – ceteris paribus – players find particularly prominent those strategies that are denoted by words more frequently used in their everyday language. To operationalize this assumption, we suggest that the prominence of a strategy-label is correlated with its frequency of occurrence in large text corpora, such as the Google Books corpus (“n-gram” frequency). In testing for the strategic use of word frequency, we consider experimental games with different incentive structures (such as incentives to and not to coordinate), as well as subjects from different cultural/linguistic backgrounds. Our data show that frequently-mentioned labels are more (less) likely to be selected when there are incentives to match (mismatch) others. Furthermore, varying one’s knowledge of the others’ country of residence significantly affects one’s reliance on word frequency. Overall, the data show that individuals play strategies that fulfill our characterization of prominence in a (boundedly) rational manner

Innovation and breaching strategies in multi-sided platform markets: Insights from a simulation study

This study explores how multi-sided digital platforms achieve and sustain superior performance positions in turbulent markets. Specifically, the effects of three major strategies are studied: (1) a complementarity-based innovation strategy, (2) a breaching strategy where a platform expands into rival territories by introducing its offerings in rival platforms to gain access to rivals’ consumers without having to switch them over, (3) the joint use of these strategies. Multi-sided platform markets tend to exhibit turbulence; hence, platform strategies need to focus on achieving and sustaining superior performance positions for longer periods. We use agent-based simulation models to show that innovation and breaching strategies contribute to platform performance. Multi-sided platforms that pursue a breaching strategy in addition to engaging in innovations achieve higher performance positions than those that only engage in innovations. Our analyses also generated insights about the importance of a fit between platform decision rules and consumer decision structures

Strategy Making in Novel and Complex Worlds: The Power of Analogy

We examine how firms discover effective competitive positions in worlds that are both novel and complex. In such settings, neither rational deduction nor local search is likely to lead a firm to a successful array of choices. Analogical reasoning, however, may be helpful, allowing managers to transfer useful wisdom from similar settings they have experienced in the past. From a long list of observable industry characteristics, analogizing managers choose a subset they believe distinguishes similar industries from different ones. Faced with a novel industry, they seek a familiar industry which matches the novel one along that subset of characteristics. They transfer from the matching industry high-level policies that guide search in the novel industry. We embody this conceptualization of analogy in an agent-based simulation model. The model allows us to examine the impact of managerial and structural characteristics on the effectiveness of analogical reasoning. With respect to managerial characteristics, we find, not surprisingly, that analogical reasoning is especially powerful when managers pay attention to characteristics that truly distinguish similar industries from different ones. More surprisingly, we find that the marginal returns to depth of experience diminish rapidly while greater breadth of experience steadily improves performance. Both depth and breadth of experience are useful only when one accurately understands what distinguishes similar industries from different ones. We also discover that following an analogy in too orthodox a manner—strictly constraining search efforts to what the analogy suggests—can be dysfunctional. With regard to structural characteristics, we find that a well-informed analogy is particularly powerful when interactions among decisions cross policy boundaries so that the underlying decision problem is not easily decomposed. Overall, the results shed light on a form of managerial reasoning that we believe is prevalent among practicing strategists yet is largely absent from scholarly analysis of strategy

Creating and capturing value from freemium business models: A demand-side perspective

Research Summary: While it has long been recognized that the business model can be a source of performance heterogeneity, less is known about how the business model affects consumers' perceptions about a firm's products and services. By taking a demand-side perspective, I argue that business models create and capture value when the elements that compose a business model improve how consumers perceive a firm's products and better enable heterogeneous consumers to act on their willingness-to-pay. I develop theory on how the freemium business model competes with the premium business model and test hypotheses in the market for digital PC games. Results show that freemium games are played less and generate less revenues and that greater variety in games' menus of paid items is associated with higher revenues

Essays On Dynamic Updating Of Consumer Preferences

Consumers dynamically update their preferences over time based on information learned through product search and consumption experiences, particularly in online media. Using three unique datasets from different domains, we address specific ways in which firms can use rich information about their customers\u27 behaviors to improve (1) the visual display of products on a webpage in online shopping, (2) predictions of new product adoption in online gaming, and (3) the timing of product release in online learning. First, we explore how consumers visually search through product options using eye-tracking data from two experiments conducted on the websites of two online clothing stores, which can inform retailers on how to position products on a virtual webpage. Second, we examine how consumers\u27 variety-seeking preferences change depending on past consumption outcomes within the context of an online multi-player video game, which can be used to improve predictions of new product adoption. Third, we use clickstream data from an online education platform to test theories of goal progress, knowledge accumulation, and boundedly rational forward-looking behavior, which can be used to explain binge consumption patterns and inform content providers on the best way to structure and release content. In each of these three projects, we build a mathematical model of individual decisions, with the parameterization grounded in theories of consumer behavior, and we demonstrate through in-sample prediction that our model is able to capture specific heterogeneous patterns within the data. We then test that our model is able to make out-of-sample predictions related to managerial interventions, and empirically verify our predictions using either lab experiments or new field data following a natural experiment policy change

Investor behaviour, financial markets and the international economy

This dissertation focuses on analysing investor behaviour and price processes in asset markets. It consists of four self-contained essays in the areas of market microstructure, risk attitude of boundedly rational investors, and international finance. Chapter 2 provides a review of the existing literature on the informational aspects of price processes. A common feature of these models is that prices reflect information that is dispersed among many traders. Dynamic models can explain crashes and illustrate a rationale for technical/chart analysis. The second emphasis of this survey is on herding models. In Chapter 3, I have developed a multi-period trading-game that analyses the impact of information leakage. I find that a trader who receives a signal about a future public announcement can exploit this information twice. First, when he receives his signal, and second, at the time of the public announcement. Furthermore, I show that the investor trades very aggressively on the rumour in order to manipulate the price. This enhances his informational advantage after the correct information is made public. He also trades for speculative reasons, i.e. he buys stocks that he plans to sell after the public announcement. Chapter 4 provides a theoretical rationale for experimental results such as loss aversion and diminishing sensitivity. A decision maker is considered to be boundedly rational if he can not find his new optimal consumption bundle with certainty when he is faced with a new income level. This makes him more risk averse at his current reference income level. It also makes him less risk averse for a range of incomes below his reference income level. Chapter 5 considers a two country economy similar to that in Obstfeld and Rogoff (1995). We find that conclusions about whether monetary shocks lead to exchange rate overshooting and spillovers on foreign production and consumption depend crucially on the form of price stickiness.' Sticky retail prices not only allow for a profitable ‘Beggar Thy Neighbour Policy’ but also lead to exchange rate overshooting. This is not the case under sticky wholesale prices and sticky wages