A Class of Behavioral Models for the Profit-Maximizing Firm

Philippe Choné and Laurent Linnemer

No 9718, CESifo Working Paper Series from CESifo

Abstract: We study the behavior of a firm that consistently maximizes a misspecified profit function. We provide an equilibrium concept where the misspecification error remains undetected. We examine the uniqueness and stability of the equilibria. The model of the price-taking firm belongs to this class. In one of these models, the cost-taking firm, the equilibrium price increases with fixed costs. The behavioural price can be lower or higher than the rational price, meaning consumers can benefit from the lack of rationality. Finally in a long-run perspective where the cost is endogenous, we show that the behavioral and rational firms end with the same level of output.

Keywords: behavioural model of a firm; misspecified profit function; fixed costs (search for similar items in EconPapers)
JEL-codes: L12 L21 L23 L25 M41 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-com, nep-cta, nep-eff, nep-ind, nep-mic and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9718

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