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DFG CRC TRR 190 Rationality and Competition

DFG Collaborative Research Center Transregio - „Rationality and Competition: The Economic Performance of Individuals and Firms“

The Collaborative Research Center Transregio “Rationality and Competition” combines the research programs of behavioral and neoclassical economists to study applied economic questions that are of high policy relevance. The focus is on the economic behavior and performance of individuals and firms: How do systematic biases in expectations, decision processes, and preferences affect the most important economic decisions of households – about education, health, labor supply, financial investments and the purchase of durable consumption goods? How do firms respond to behavioral biases of their customers and their employees, for example by adjusting their marketing strategies, their organizational design, their incentive schemes and their innovation activities? What economic policy interventions are effective to protect consumers and employees from exploitation and how can they prevent the destabilization of markets (due to bubbles and crashes)? The LMU Munich and the HU Berlin are the leading institutions, complemented by additional research institutions like the ifo Institute or the Max-Planck Institute.

Project A05 (Spann and Klapper) – “Consumer Decisions on Durable Products”

Project (A05) Spann and Klapper  studies consumer decisions on high-priced durable goods and novel services with a special focus on automotive demand. Consumers may exhibit behavioral biases when buying a car, such as biased expectations about their own future behavior, gasoline prices, the resale value of cars or the potential savings from using car sharing services. The automobile industry is particularly promising to study behavioral biases: On the one hand, consumers are facing a “big ticket” decisions which make consistent choice behavior likely but on the other hand, constant innovation and competition increase the complexity of choice decisions (e.g. due to the emergence of new transmission technologies and new car sharing services), which make biased choice behavior likely. The project aims to enhance the understanding of deviations from rational decision making and the existence of potential behavioral biases. It will investigate, for example, the causal effects of overconfidence and ambiguity aversion on consumers’ choices for alternative fuel efficiency technologies in automobiles and for flat-rates (owning) vs. pay-per-use consumption (demand-driven renting). In addition, the project will analyze how the direction and the degree of these biases are affected by the framing of the decision, e.g., information and choice-elicitation interfaces provided to consumers. The generated results will inform firms on how to formulate marketing strategies and policy makers on how to design regulations that avoid wrong processing of information and biased choices. Additionally consumers can be informed about their decision behaviour and how to potentially adapt it. Methodologically the project will employ induced-value laboratory experiments, hypothetical discrete choice experiments, and field experiments.