The Behavioral Economics of Firms

3.0 credits · Undergraduate

Why do competing gas stations sometimes charge different prices for identical fuel? Why do airlines use pricing algorithms that leave seats empty? Why do some incentive schemes motivate workers while others backfire? Most behavioral economics research focuses on consumer biases or individual decision-making. Firms, in contrast, are often assumed to behave optimally because they’re guided by groups of decision makers and face market pressures to perform well. This course explores a different question: how do behavioral biases shape the decisions of even very large firms in both outward-facing decisions like pricing and inward-facing decisions like incentive design? Drawing on behavioral economics and evidence from real firms (gas stations, airlines, retailers, and warehouses), we’ll investigate how psychological factors like overconfidence, anchoring, and misspecified mental models affect firm behavior.