Re: Free Market
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Assumption: Market actors act rationally and in their best interests
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There was just a long discussion on this in the Magazine Forum, in response to Dr. Al's magazine article about the social value of poker.
The point here is that the free market does not need rational behavior for the market to work efficiently (obviously, or our economy would have collapsed years ago). But an economic model based on such an assumption is easy to understand and it has very good predictive value. In fact, the aggregate economy behaves as if every consumer is acting rationally, even though many individuals are not.
In the specific example, you can often see people buying gas at a station when the station across the street is showing a much lower price. Near my office, the SuperAmerica raises prices every Thursday morning, and the BP across the street doesn't match them until mid afternoon. People continue to buy gas at the SA. Why? Didn't see the signs; habit; they like the coffee at SA better; the BP cashier is grumpy; etc. None of those things are rational, but they drive the economy.
What do you do when the rational behavior assumption turns out to be false? Advertise the irrational benefits of your product. (I.e., use our product and you will be thinner, richer, and get laid more.)
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