Date of Submission


Date of Award


Institute Name (Publisher)

Indian Statistical Institute

Document Type

Doctoral Thesis

Degree Name

Doctor of Philosophy

Subject Name

Quantitative Economics


Economics and Planning Unit (EPU-Delhi)


Chowdhury, Prabal Roy (EPU-Delhi; ISI)

Abstract (Summary of the Work)

Many traits of economic agents are well studied and understood by psychologists that are yet to be captured by economic theory. This thesis, in the field of behavioral economics, is yet another attempt at unifying the different approaches of the two well-established disciplines - we ask what does economics predict of the behavior of economic agents ... once the psychology behind their decisions is accounted for. In a nutshell, this thesis is about the implications of choice-making among available alternatives.We begin with the idea that an economic agent only derives satisfaction from what he consumes without worrying at all (let alone too much) about what he does not. This idea has been contested by celebrated psychologists like Barry Schwartz who argue that if what is bought falls below expectations, then the nagging thought about a potentially better alternative that was not purchased, takes away from the utility from consuming/using what was bought. This idea is being researched by economists, who also found that consumer benchmark is context-dependent. The use of default options (Park et al, 2000, and Johnson et al, 2002), historical values (Klein and Oglethorpe, 1987), expectations (Song, 2012), and anchoring (Chapman and Johnson, 1999 and Strack and Mussweiler, 1997) by consumer are sometimes to simplify their decision making process. The effect of these comparisons is not limited to the consumer choices, for they also influence firms' strategic decisions (Zhou, 2011; Heidhues and KÅ‘szegi, 2005; Heidhues and KÅ‘szegi, 2008 and Spiegler, 2012).In fact, with durable goods the negative effect due to comparison is magnified - every time a commodity is used, an agent is reminded that he could have made a better choice. While we take up the implications of this discussion more elaborately in the final chapter of this thesis (Chapter 4) in a welfare-framework, for now it is important to note that consumers frequently compare what they buy with what they do not - particularly when there are reasons to believe that the latter is better. This is the central theme of Chapter 2 of the thesis.1.2 Monopoly and the other: Reference dependence in vertically differentiated markets In this chapter, we acknowledge that those who do not buy/consume the best-available alternative in a given market, are also the ones who face a utility-loss from the very fact that they are not consuming the best - that they have settled for something of a lesser value takes away from their utility from consumption. We capture this idea theoretically in a two-product setting, where the products differ in quality. We model a consumer who faces a utility loss from consumption, unless he consumes the best product available. As a first step, we ask if firms can benefit from accounting for this trait of its consumers while making its own pricing decisions. We find that the answer to this question is in the affirmative - in our duopoly setting involving one high-quality, and one low-quality manufacturing firm, we demonstrate that firms can indeed earn higher profits by accounting for this utility-loss faced by some consumers in their pricing decisions (in comparison with the profits they would earn if they did not account for the same).


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Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.


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