Rational vs. irrational firm's optimal price and social welfare
by Yinlong Xue
International Journal of Society Systems Science (IJSSS), Vol. 8, No. 4, 2016

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.

Online publication date: Sat, 07-Jan-2017

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