Research Article Open Access

Imperfectly-Rational Agents, Volatility of Reserves and Customer Markets

Partha Gangopadhyay1 and Renu Gangopadhyay2
  • 1 School of Economics and Finance, University of Western Sydney, Campbelltown Campus Locked Bag 1797, NSW 1797, Australia
  • 2 Sydney Harbour Foreshore Authority, 66 Harrington Street, The Rocks, NSW 2000, Australia

Abstract

Potential customers in customer markets are typically dichotomised into actual and prospective customers. If the firm holds its price firm, the actual customers hold their reserves/reservation price firm and repeat their purchases. On the other hand, prospective customers’ reserves may be volatile due to their non-equilibrium market experience. One may regard a prospective buyer with a volatile reserve as imperfectly rational. On the other hand, one may suppose that an actual customer with a firm reserve is fully rational. We examine this hitherto-neglected asymmetry in customer markets to highlight that a firm can use imperfectly rational and prospective customers-characterised by their volatile reserves-as a European option. As the volatility increases, so does the value of the option of selling the products to the prospective customers. We also establish that volatility of reserves and hence imperfection in rationality of buyers, can have positive impact on output and employment in customer markets.

American Journal of Applied Sciences
Volume 2 No. 13, 2005, 39-44

DOI: https://doi.org/10.3844/ajassp.2005.39.44

Published On: 11 December 2005

How to Cite: Gangopadhyay, P. & Gangopadhyay, R. (2005). Imperfectly-Rational Agents, Volatility of Reserves and Customer Markets. American Journal of Applied Sciences, 2(13), 39-44. https://doi.org/10.3844/ajassp.2005.39.44

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Keywords

  • Customer market
  • reserves
  • relative risk aversion
  • options