Biased Beliefs in Search Markets

Arbeitspapier

We study the implications of biased consumer beliefs for search market outcomes in the seminal framework due to Diamond (1971). Biased consumers base their search strategy on a belief function which specifies for any (true) distribution of utility offers in the market a possibly incorrect distribution of utility offers. If biased consumers overestimate the best offer in the market, a novel type of equilibrium may emerge in which firms make exceptionally favourable offers in order to meet biased consumers' unreasonable high expectations which then become partially self-fulfilling. Consequently, the presence of biased consumers may improve the welfare of all consumers.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper ; No. 365

Classification and Topics

• Classification: Wirtschaft ; Consumer Protection ; Firm Behavior: Theory ; Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
• Subject: consumer search ; bounded rationality ; cursed beliefs

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gamp, Tobias ; Krähmer, Daniel
• Event: Veröffentlichung
• (who): Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition
• (where): München und Berlin
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/282057
• Last update: 10.03.2025, 11:45 AM CET