Bounded Rationality and Industrial Organization by Ran Spiegler

Author:Ran Spiegler [Spiegler, Ran]
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2011-02-18T05:00:00+00:00

8 Coarse Reasoning

The sampling-based procedure studied in Chapters 6 and 7 captured the idea that when consumers face a complex market object, they use a simplifying heuristic: examine a small part of the object in detail and extrapolate naively in order to assess the object as a whole. In this chapter we continue our exploration of consumers with bounded ability to cope with complex market environments, but from a different, complementary angle. In the models examined in this chapter, the consumer will process the entire available data on the market objects he faces (typically complex pricing strategies). However, to simplify his decision problem, the consumer will create a “coarse representation” of the data and reason entirely in terms of this representation. The decision error that may result from coarse reasoning is that the consumer will fail to perceive patterns that underlie the data, a failure which may be exploited by firms.

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