Biased Beliefs in Search Markets

Tobias Gamp and Daniel Krähmer
Additional contact information
Tobias Gamp: HU Berlin
Daniel Krähmer: University of Bonn

No 365, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

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.

Keywords: consumer search; bounded rationality; cursed beliefs (search for similar items in EconPapers)
JEL-codes: D18 D21 D43 D83 (search for similar items in EconPapers)
Date: 2022-12-30
New Economics Papers: this item is included in nep-com, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://rationality-and-competition.de/wp-content/uploads/2022/12/365.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:365

Access Statistics for this paper

More papers in Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition
Bibliographic data for series maintained by Viviana Lalli ().