Conventional economic theory assumes that consumers are fully rational, that they have well-defined preferences and easily understand the market environment. Yet, in fact, consumers may have inconsistent, context-dependent preferences or simply not enough brain-power to evaluate and compare complicated products. Thus the standard model of consumer behavior-which depends on an ideal market in which consumers are boundlessly rational-is called into question. While behavioral economists have for some time confirmed and characterized these inconsistencies, the logical next step is to examine the implications they have in markets.

Grounded in key observations in consumer psychology, Bounded Rationality and Industrial Organization develops non-standard models of "boundedly rational" consumer behavior and embeds them into familiar models of markets. It then rigorously analyses each model in the tradition of microeconomic theory, leading to a richer, more realistic picture of consumer behavior. Ran Spiegler analyses phenomena such as exploitative price plans in the credit market, complexity of financial products and other obfuscation practices, consumer antagonism to unexpected price increases, and the role of default options in consumer decision making. Spiegler unifies the relevant literature into three main strands: limited ability to anticipate and control future choices, limited ability to understand complex market environments, and sensitivity to reference points.

Although the challenge of enriching the psychology of decision makers in economic models has been at the frontier of theoretical research in the last decade, there has been no graduate-level, theory-oriented textbook to cover developments in the last 10-15 years. Thus, Bounded Rationality and Industrial Organization offers a welcome and crucial new understanding of market behavior-it challenges conventional wisdom in ways that are interesting and economically significant, and which in the end effect the well-being of all market participants.

"Nobody thinks like Adam Smith when buying a toothbrush, but this is the assumption of consumer behavior offered in traditional economics textbooks. Marketing experts used to laugh at such naivety, but they will have to take economic theory more seriously from now on. Ran Spiegler's book takes on the challenge of rewriting the theory of industrial organization without the classical assumption that economic agents are all rational supermen. This is an important book that nobody working on industrial organization will wish to be without."--Ken Binmore, University College London

"Spiegler's Bounded Rationality and Industrial Organization is a beautifully written book. He makes a compelling case that understanding what happens when boundedly rational consumers meet sophisticated firms is both intellectually interesting and practically important. He has a wonderful feel for using rigorous models to clarify arguments and develops insights from a number of branches of the emerging literature in a parsimonious way. It is a must read book."--Glenn Ellison, Massachusetts Institute of Technology

"In Ran Spiegler's typical style, perfectly crafted simple models are used to illustrate deep ideas that lie at the heart of existing frontier research and, no doubt, future research this book is bound to inspire." -Jeffrey Ely, Northwestern University

"In a timely and indispensable contribution, Ran Spiegler presents formal, elegant, and stylized models that synthesize and find common ground in previous approaches to incorporating non-standard assumptions of consumer behavior into otherwise standard market settings. His textbook will be an extremely valuable source for students wanting to learn more about modeling bounded rationality. And his unifying models will likely set the stage for further contributions in this exciting area."--Ignacio Esponda, Stern School of Business, New York University

"Over the past decade, Ran Spiegler has been a market leader at incorporating models of bounded rationality into the theory of industrial organization. The book lucidly distills often complex models to their essential elements, often by offering new and improved versions. Always elegant and occasionally iconoclastic, Spiegler's book achieves that rare double of advancing the research frontier while creating a reference guide that every student of the field will want to own."--Erik Eyster, London School of Economics

"A beautiful book, rich in thoughtful modeling ideas and economic insights and low on 'fluff.' The book is a treasure for teachers of advanced courses in economic theory and industrial organization. The author sets an example for students and researchers wishing to build microeconomic models in the age of behavioral economics. I don't know whether this book will change industrial organization but it ought to."--Ariel Rubinstein, Tel Aviv University and New York University

Ran Spiegler

Professor of Economics at Tel Aviv University and University College London