Title: Rational vs. irrational firm's optimal price and social welfare

Authors: Yinlong Xue

Addresses: University of Science and Technology of China, Hefei, Anhui 230026, China

Abstract: This paper builds three models to explore the value of market irrationality when consumer's expectations of product quality and product availability follow two distribution functions. A benchmark model with rational expectations is set; two models with irrational expectations and social welfare discussion follow it. Three contributions have been made in this paper: 1) obtain the firm's optimal decisions in rational and irrational market environments; 2) compare results in the rational case and in the irrational case, and further point relationships of these optimal results; 3) prove that social benefits belong to both firm and consumers in the irrational case (this conclusion is different from that in the rational case) and shed light on ways to improve social welfare under consumer irrational expectations.

Keywords: rational expectations; irrational expectations; product quality; product availability; social welfare; market irrationality.

DOI: 10.1504/IJSSS.2016.081412

International Journal of Society Systems Science, 2016 Vol.8 No.4, pp.320 - 336

Received: 14 Dec 2015
Accepted: 03 May 2016
Published online: 07 Jan 2017 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article