Incorporating Intransitive Indifference into Classical Economic Analysis

Intransitive indifference refers to a behavioural phenomenon that is at the same time very realistic and yet rarely taken seriously in economics. The classical illustrative example was due to Luce (1956). Consider a coffee drinker choosing between two cups of coffee, where the second cup differs from the first in having only one more grain of sugar. Apparently he will not be able to tell them apart, and hence behaviourally he is indifferent between the two. However, such an indifference is not transitive. Imagine a succession of cups of coffee, where the n th cup always differs from the (n 1)th cup in having only one more grain of sugar . For n sufficiently large, the coffee drinker will be able to tell that the n th cup is sweeter than the first one, although along the whole process he has always been behaviourally indifferent between any two adjacent cups.

This behavioural phenomenon is of course much more general than coffee drinking. In our daily life as a consumer, we repeatedly face choices that are "too close to tell apart". Yet the studies of intransitive indifference have been largely confined to decision theorists. So far there is no attempt in exploring the consequences of incorporating it into classical economic analyses. We are the first to fill this void. In our exploratory work, we have obtained some interesting consequences of intransitive indifference. When consumers feature intransitive indifference, putting a bad deal alongside a good deal can boost the sale of the latter by helping consumers to better appreciate it. When sellers compete for these consumers, they tend not to undercut each other, because undercutting often go unappreciated. Instead, sellers segregate into providers of good deals and bad deals, with the formers freeriding the latters in helping consumers better appreciate their good deals, and the latters freeriding the formers in making consumers less hesitant to buy.

While our exploratory work shows that it is promising to generate an array of novel insights by incorporating intransitive indifference into classical economic analyses, they were obtained from a rather stylized model with some admittedly restrictive simplifying assumptions (see the "Background of Research" section). In this proposed project, we plan to relax these restrictive assumptions. By doing so, not only that we can check the robustness of our preliminary results, we can also explore research questions that cannot even be articulated within the simple setting in our exploratory work.

We expect that at least one international refereed journal article and several international conference/seminar presentations will be generated from this project. In the longer run, we expect that our research will help generate novel insights and research questions not only in the industrial organization literature, but also in the literatures of marketing, consumer studies, and competition policies.