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Showing posts from June, 2012

Decision Making as Output and Bounded Rationality

  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra

Prisoners Dilemma and Retail Promotions

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It is not unusual to get 1 kg onion free for purchases above say Rs. 250/- or half kg sugar free for purchases above say Rs. 300/- in leading retail outlets. Does this attract consumer loyalty. A study sometime back along with my students revealed certain interesting dimensions. The presentation is found here . I will delve into certain dimension here. Promotions are key element in this process and higher promotional elasticity will be driven by the increased ambiance as an output coupled with reduction in psychic costs. Researchers and strategists can use utility models to study consumer behavior and the reasons for their preference towards particular stores. In the increased emphasis on promotions, an interesting fact to note that customers continue to be loyal to firms like Nilgiris and Namdharis which are very low on promotions. At least in the initial phases, customer loyalty could not be generated in major food retailers despite excessive emphasis on promotions as the f

Advertising and firm Value- Prisoner's Dilemma??

We are constantly bombarded by advertisements. Ads urge us to buy all and sundry. Something to be probed is the motives behind advertising by the firms. further is the question about the success of the motives. Conventional literature suggests AIDA model. it suggests the impact of advertising in terms of Attention, Interest, Desire and Action. Does Advertising result in action or merely creates an attention and probably a degree of interest. One of my papers attempts to measure impact of advertising on firm value. We believe, if advertising has to succeed, it should increase firm value. We measure firm value by Tobin's Q. the full paper is found here .  The results are in a way surprising. Except for banking and financial services and consumers, hypothesis that advertising does not influence firm value cannot be rejected. If advertising does not influence firm value, why firms go on a spending spree. Estimates suggested advertising in India is to the tune of around Rs. 30,000 cro