Essays on Economic Behavior under Uncertainty

Abstract

This dissertation studies models of economic behavior under uncertainty.

In the first chapter, I show that the additive representation of preferences over menus of lotteries proven by Dekel, Lipman and Rustichini (2001) is consistent with any preference relation among the deterministic alternatives in their model, formally demonstrating that the use of the lottery framework imposes no constraints on finite choice behavior. The result also yields an additive representation which relaxes the two substantive axioms in Kreps (1979) flexibility representation theorem.

The second chapter studies systems of (incomplete) preferences over lotteries and the conditions under which these preferences are simultaneously consistent with a single expected utility representation, a coherence property called "expected utility rationalizability". In particular, I consider preferences which only compare lotteries involving a subset of the set of all possible prizes. The main result is a full characterization of expected utility rationalizability in terms of the utility indexes locally representing the incomplete preferences. Moreover, I identify a class of systems for which weaker conditions are sufficient. I apply the analysis to develop a revealed preference theory under risk and to extend the model of Anscombe and Aumann (1963) to cases in which the set of available prizes varies with the state.

The third and final chapter studies the dynamic problem of a monopolistic seller who suddenly finds the dominant market position of her product challenged by the appearance of a new substitute of uncertain value for her customers. I study optimal pricing when facing a continuum of small consumers who continuously learn about their specific valuation as they try out the new product. For the case of two market segments and binary valuations, I construct Markov perfect equilibria with and without price discrimination. With price discrimination the equilibrium is efficient in the sense that consumers switch products at the socially optimal point. Without price discrimination consumers experiment too much and dynamic inefficiencies arise. However, the asymptotic outcomes are almost surely efficient which means that the distortionary effects of market power in this model are at most temporary.