Abstract:

In the first chapter of this dissertation I introduce competition in the habit formation literature. I model a two-period game in which two firms can enter a market and compete with each other, and individuals' favorite characteristics in the second period are the characteristics of the product they consumed in the first period. I find that if two firms enter the market, they do it sequentially. That is, one firm enters in the first period and attracts individuals' preferences to the characteristics of its product, while the other firm enters in the second period and competes for the individuals that have grown to prefer the characteristics of the original product. However, the second firm's product is similar to the original one, but not exactly the same.

In the second chapter I extend Matthew Rabin's model of fairness equilibria (1993) to groups of individuals. This allow me to introduce three aspects from reality that are absent in game theory: (i)?individuals discriminate in favor of members of their own groups, (ii)?individuals like individuals that not only are kind to them, but that are kind to other individuals, specially individuals of their own groups, and (iii)?individuals discriminate in favor of members of groups they like. I define a new equilibrium that takes in consideration these emotions, what I call group fairness equilibrium. Rabin defines the mutual-max outcomes for a single game as outcomes where each player maximize the other player's material payoffs and the mutual-min outcomes as outcomes where each player minimize the other player's material payoffs. Some basic results of my model are that a combination of strict Nash equilibrium in several games, will always be a group fairness equilibrium for large values of the material payoffs, and that any outcome that is either strictly mutual-max for both games or strictly mutual-min for both games is a group fairness equilibrium for large values of the material payoffs.