Higher-Order Beliefs and (Mis)learning from Prices

Kevin He () and Jonathan Libgober ()
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Kevin He: University of Pennsylvania
Jonathan Libgober: University of Southern California

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We study misperceptions of private-signal correlation in an incomplete-information Cournot duopoly game. Exaggerating the correlation between players’ demand signals is beneficial when agents hold flexible beliefs about price elasticity, but harmful when their beliefs are dogmatically correct. For agents with flexible beliefs who learn elasticity by observing prices, correlation misperceptions indirectly distort behavior through elasticity misinference. If agents know the true elasticity, this learning channel is eliminated. Correlation misperceptions have opposite direct and indirect effects on behavior, so the presence of elasticity inference can reverse an error’s viability.

Pages: 52 pages
Date: 2025
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