Case Study One
Classical economics is based on the assumption that individuals strive to act in a rational way. In other words, they can accurately evaluate the consequences of possible choices. Moreover, this theory also implies that people want to maximize the profit that can be derived in a given situation (Herbst 9). In contrast, the supporters of behavioral economics emphasize the idea that in many cases, various emotional and cognitive factors can prevent people from acting in a rational way (Altman 137). Under such circumstances, they may not follow the profit maximization principle. The operations of such a company as stickK1 are based on some premises of behavioral economics.
The managers of this organization assume that people, who want to give up a bad habit such as smoking, are more likely to achieve this goal if there is some money at stake. In particular, they sign a contract according to which they are obliged to give away some amount of money provided that they fail to attain an objective within a certain period (John 2). Thus, they will be more motivated to fulfill the promises that they give to other people (John 2). The proponents of classical economics cannot explain this behavior because they think that individuals will not try to risk their money without expecting any financial rewards. It is one of the differences that should be considered. This case study indicates that behavioral economics can be useful for explaining the decisions of individuals.
The managers of stickK also rely on the principles of game theory to explain the choices of their customers. In particular, it is possible to construct the payoff matrix for a single player.
It should be noted that the third party can be a relative of the client or a charitable organization. Judging from this matrix, one can argue that customers will be more motivated to keep their promises. Furthermore, in each scenario, the money may serve beneficial purposes. As a rule, payoff matrices are created for several agents who can take different choices. In turn, this matrix was created only for a single person because, in this case, the outcomes are dependent only on the actions of a client. It is one of the issues that can be identified.
Such concepts as bundling and tying mean that customers are required to purchase a product that they do not need (Choi 97). For instance, a person, who wants to buy the text-editing software, can be asked to acquire a spreadsheet application. This policy has been adopted by Microsoft. Such activities are considered to be monopolistic practices that can be outlawed or at least penalized (Schmidt 10). Nevertheless, such a company Staples Advantage takes a slightly different approach to this issue. In particular, this organization enables two or more buyers to combine the purchases that they want to make. In turn, they can acquire goods and services from a single company. In this way, customers can to lower the prices. Moreover, this form of cooperation can benefit suppliers that can raise their sales rates. It should be mentioned Staples Advantage fosters the cooperation between various businesses. It is the chief peculiarity of this approach. Thus, one can argue that entrepreneurs should be able to look at a problem from different perspectives. This strategy is necessary for finding new opportunities that could be overlooked for a long time.
Case Study Two
Organization of the Petroleum Exporting Countries or OPEC is the cartel that includes several states, such as Saudi Arabia, Qatar, the UAE, and so forth (Ahrari 227). This agency sets the annual quotas for the production of oil. It is supposed that these restrictions can prevent the oil prices from declining (Ahrari 227). One should bear in mind that some countries such as Norway and Russia have not joined OPEC, but they tend to support the policies of this cartel (Ahrari 227). The governments of these countries assume that the policies of OPEC can increase their revenues because the prices will be kept at the artificially high level. At the same time, these states do not want to accept the quotas imposed by OPEC. These policy-makers believe that this approach can increase the revenues of the companies involved in the production and export of oil.
Nevertheless, one should keep in mind that OPEC may not be very efficient in controlling the prices. The problem is that the members of this organization often exceed the quotas that are set for them. Moreover, these countries have conflicting interests (Ahrari 227). Additionally, they may encounter different problems. Therefore, one should not suppose that the initiatives of this cartel are always efficiently implemented. It is one of the challenges that should not be disregarded by policy-makers.
Works Cited
Ahrari, Muhammad. OPEC: The Failing Giant, Levington: University Press of Kentucky, 2015. Print.
Altman, Morris. Handbook of Contemporary Behavioral Economics: Foundations and Developments, New York: Routledge, 2010. Print.
Choi, Jay. Recent Developments in Antitrust: Theory and Evidence, Boston: MIT Press, 2007. Print.
Herbst, Anthony. Capital Asset Investment: Strategy, Tactics and Tools, New York: John Wiley & Sons, 2003. Print.
John, Leslie. Making stickK Stick: The Business of Behavioral Economics, Boston: Harvard Business School, 2014. Print.
Schmidt, Hedvig. Competition Law, Innovation and Antitrust: An Analysis of Tying and Technological Integration, New York: Edward Elgar Publishing, 2006. Print.
Footnotes
- It is the spelling used by the founders of the company.