Competitive Markets with Imperfectly Discerning Consumers

Yair Antler and Ran Spiegler

No 19562, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a market model in which products generate state-dependent potential hidden charges. Firms differ in their ability to realize this potential. Unlike firms, consumers do not observe the state. They try to infer hidden charges from market prices, using idiosyncratic subjective models. We show that an interior competitive equilibrium is uniquely given by what is formally a Bellman equation. Using this representation, we show that relative to rational expectations, add-on charges are lower whereas headline prices and social welfare are higher. Market responses to shocks display patterns that are impossible under rational expectations. For example, although fully revealing, equilibrium prices can vary with consumers' private information.

Keywords: Competitive equilibrium; Boundedly rational expectations; Add-ons; Hidden fees (search for similar items in EconPapers)
JEL-codes: D41 D84 (search for similar items in EconPapers)
Date: 2024-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP19562 (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:cpr:ceprdp:19562

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP19562

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().