Biased Beliefs in Search Markets
- (pp. 414-64)
Abstract
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 that 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 favorable offers in order to meet biased consumers' unreasonably high expectations, which then become partially self-fulfilling. Consequently, the presence of biased consumers may improve the welfare of all consumers.Citation
Gamp, Tobias, and Daniel Krähmer. 2023. "Biased Beliefs in Search Markets." American Economic Journal: Microeconomics, 15 (2): 414-64. DOI: 10.1257/mic.20210007Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D21 Firm Behavior: Theory
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D84 Expectations; Speculations
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