Executive Summary
Marketing is an applied science that attempts to explain and influence how firms and consumers actually behave in markets. Marketing models are usually applications of economic theories. These theories are general and produce precise predictions, but they rely on strong assumptions of consumer and firm rationality. Theories based on rationality limits could prove similarly general and precise, while grounding theories in psychological plausibility and explaining facts that are puzzles for the standard approach.
Behavioral economics explores the implications of the limits of rationality. The goal is to make economic theories more plausible while maintaining formal power and accurate prediction of field data. This review focuses selectively on six types of models used in behavioral economics that can be applied to marketing.
Three of the models generalize standard preference structures to allow (1) sensitivity to reference points and loss aversion, (2) social preferences toward outcomes of others, and (3) preference for instant gratification. The three models are applied to industrial channel bargaining, sales force compensation, and pricing of virtuous goods, such as gym memberships. The other three models generalize the concept of game-theoretic equilibrium, allowing decision makers to make mistakes, encounter limits on the depth of strategic thinking, and equilibrate by learning from feedback. These are applied to marketing strategy problems involving pricing differentiated products, competitive entry into large and small markets, and low-price guarantees.
The main goal of this selected review is to encourage marketing researchers of all kinds to apply these tools to marketing. Understanding the models and applying them is a technical challenge for marketing modelers, which also requires thoughtful input from psychologists studying details of consumer behavior. As a result, such models could create a common language for modelers, who prize formality, and for psychologists, who prize realism.
Biography
Teck H. Ho is William Halford Jr. Family Professor of Marketing at the University of California, Berkeley. Before his position at Berkeley, he held academic positions in the Wharton School at the University of Pennsylvania and in the Anderson School at the University of California, Los Angeles. His professional leadership includes roles as an associate editor of Management Science in two departments (Decision Analysis and Operations and Supply Chain Management) and an editorial board member of Journal of Marketing Research, Marketing Science, Manufacturing and Service Operations Management, and Quantitative Marketing and Economics. He has published extensively in various areas of marketing and technology management and has been awarded several research grants by National Science Foundation for his research in experimental and behavioral economics. He won the Deloitte and Touche Best Advisor Award for Management Field Study at the University of California, Los Angeles, in 1996 and was the finalist for the Helen Kardon Moss Anvil Teaching Award at Wharton in 2000. He won the Best Teacher of the Year Award at the Haas School of Business at Berkeley in 2003 and 2004 for teaching an MBA class in Pricing Policy.
Noah Lim is Assistant Professor of Marketing in the C.T. Bauer College of Business at the University of Houston. His research focuses on applying experimental and behavioral economics methods to marketing problems. His current projects include experimental studies of nonlinear price contracts, pricing strategies when customers are boundedly rational, and field experiments of sales contests. He received his PhD in Marketing from the Wharton School at the University of Pennsylvania, where he was a recipient of the Penn Prize for Excellence in Teaching by Graduate Students.
Colin F. Camerer is Axline Professor of Business Economics at the California Institute of Technology, a position he has held since 1994. He received his PhD in Decision Theory from the University of Chicago in 1981. He was elected a fellow of the Econometric Society and the American Academy of Arts and Sciences and is the current president of the Society for Neuroeconomics. He is the author of more than 90 book chapters and journal articles and is the author or editor of five books. His research uses experimental and field data to inform behavioral economics, the creation of psychological foundations for economic theory, with applications in risky choice, game theory, and market trading. His most recent research is about the neural foundation of economic decisions, using brain imaging, tracking eye movements and psychophysiological responses, and studies with brain-damaged patients and other special populations.
J Marketing Research, Volume 43, Number 3, August 2006
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