Analysis of dynamic models of oligopoly with the bounded rationality of consumers

In neoclassical literature, the rationality of consumers is a dominant assumption. Among others, it indicates that a consumer, while making purchase decisions, always chooses an option that maximises his/her happiness. In that process, they acknowledge and fully understand the characteristics of the offered product; however, if they do not posses complete information about it, they can perform complicated procedures of statistical inference and base its results in the decision-making process.

However, as it is shown by empirical evidence that people make their purchasing decisions based not on objective premises but on fragments of knowledge often collected from own experience or from close relatives. The inference is whereas performed not from objective statistics but from collecting a sampling of data and in a very simplified manner. Nevertheless, for decades, while analysing oligopoly models, i.e. situations where there are so few firms on the market that they have a significant impact on the market situation, there was a dominant assumption of the rationality of consumers.

However, the irrational behaviour of consumers provides a basis the the existence of phenomena such as deliberate choosing of worse and more expensive products, the existence of quacks, information campaigns or the existence of different prices of products with identical characteristics. The purpose of the project is to attempt to include into classical oligopoly models an aspect of leaving the consumers’ rationality assumption and analysis of consequences of such an action. In particular, a pursuit will be made to answer the question of to what extent can firms exercise the irrationality of consumers, and how does it affect prices and the quality of offered products concerning dynamically changing experiences and tastes.

Moreover, determining the loss for the consumers due to their irrationality will allow one to verify the possibilities and scope of public policies concerning educating consumers in terms of purchased products, such as rating agencies or quality certificates. The conducted analysis will have theoretical character and will be performed through mathematical modelling with the use of game theoretical tools. As a result of the research, it will be possible to describe more realistic market interactions. It will also constitute a basis for more applied models and empirical analysis in this field of study.




Project director:
Bartłomiej Paweł Wiśnicki, M.A.
Financing institution:
National Science Centre
Project duration:
March 2018 - March 2021
Web of science classification category:
Organizational unit (collegium/department/unit):
SGH Warsaw School of Economics » Collegia » Collegium of Economic Analysis