Biased Beliefs in Search Markets

Gamp, Tobias; Krähmer, Daniel (30. December 2022): Biased Beliefs in Search Markets. Collaborative Research Center Transregio 190, Discussion Paper No. 365

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 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.

• Item Type: Paper (Discussion Paper)
• Keywords: consumer search; bounded rationality; cursed beliefs
• Faculties: Economics > Collaborative Research Center Transregio "Rationality and Competition"
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D18, D21, D43, D83
• Language: English