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Gamp, Tobias and Krähmer, Daniel (30. December 2022): Biased Beliefs in Search Markets. Collaborative Research Center Transregio 190, Discussion Paper No. 365 [PDF, 809kB]

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.

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