Behavioral Consumers in Industrial Organization: An Overview

Abstract

This paper overviews three primary branches of the industrial organization literature with behavioral consumers. The literature is organized according to whether consumers: (1) have non-standard preferences; (2) are overconfident or otherwise biased such that they systematically misweight different dimensions of price and other product attributes; or (3) fail to choose the best price due to suboptimal search, confusion comparing prices, or excessive inertia. The importance of consumer heterogeneity and equilibrium effects are also highlighted along with recent empirical work.