Bounded Rationality, Heterogeneity and Learning

Abstract

The dissertation deals with both a model in which agents with limited information conform to a learning rule, as well as boundedly rational consumers who follow simple rules of thumb. The first case is treated within a generic, illustrative model situation, the so-called Shower Temperature Problem, in which the agents possess either the same (homogeneous) or an individual (heterogeneous) action space. The latter case is treated for consumer markets and additionally requires the modeling of an appropriate, strategic pricing of firms.<br /> The analysis of the Shower Temperature Problem shows that action heterogeneity represents a robust solution for the agents with only few systematic deviations, but at the cost of a higher risk for the individual agent than in the homogeneous case.<br /> Regarding the market of boundedly rational consumers, interesting results are obtained how psychological and experimental results can be cast into a mathematical model with boundedly rational, habit-forming and imitative consumers; this consumer model is analyzed and consequences are investigated. From the firms' point of view, conditions under which firms operate profitably in the long-term are examined. Furthermore, it is shown that the considered market is in a sense well-behaved, since for a rising number of firms, the prices decrease, the prices of the weakest products converge against marginal costs, and the welfare rises. Additionally, it is proven for a monopoly that Nash equilibria are found in the strategy space of all time-constant price paths. Finally, advertising is shown to be an effective method to sustain demand.