Biased Beliefs in Search Markets

Tobias Gamp and Daniel Krähmer

American Economic Journal: Microeconomics, 2023, vol. 15, issue 2, 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.

JEL-codes: D11 D21 D83 D84 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1257/mic.20210007

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