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Do sellers exploit biased beliefs of buyers? An experiment

Lukas M. Wenner

Games and Economic Behavior, 2018, vol. 110, issue C, 194-215

Abstract: I study experimental markets in which sellers interact with buyers who have biased beliefs about characteristics of the product sold. I examine whether such buyers can be exploited by sellers through the use of specifically designed pricing structures. Theoretically, I show that a necessary condition for exploitation is consumer naiveté about their belief bias, otherwise they infer their biased beliefs from the sellers' actions. My main experimental result establishes that whether exploitation arises depends on how difficult it is for buyers to make such inferences. When sellers can only make take-it-or-leave-it offers, no exploitation arises. If, however, contracts are agreed upon by bilateral bargaining, sellers earn higher profits compared to the case with unbiased beliefs. I present evidence that in the former case buyers anticipate and prevent exploitation. In the latter case, the richer interaction structure makes it harder for buyers to infer the sellers' incentives, leading to exploitation.

Keywords: Biased beliefs; Consumer exploitation; Laboratory experiment; Behavioral IO; Consumer sophistication (search for similar items in EconPapers)
JEL-codes: C92 D03 D83 L15 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:gamebe:v:110:y:2018:i:c:p:194-215