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Biased Beliefs in Search Markets

Author

Listed:
  • Tobias Gamp
  • Daniel Krähmer

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.

Suggested Citation

  • Tobias Gamp & Daniel Krähmer, 2023. "Biased Beliefs in Search Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 15(2), pages 414-464, May.
    • Handle: RePEc:aea:aejmic:v:15:y:2023:i:2:p:414-64
    DOI: 10.1257/mic.20210007
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    Citations

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    Cited by:

    1. Carl-Christian Groh, & Jonas von Wangenheim, 2024. "Pigou Meets Wolinsky: Search, Price Discrimination, and Consumer Sophistication," CRC TR 224 Discussion Paper Series crctr224_2024_527, University of Bonn and University of Mannheim, Germany.
    2. Karle, Heiko & Schumacher, Heiner & Vølund, Rune, 2023. "Consumer loss aversion and scale-dependent psychological switching costs," Games and Economic Behavior, Elsevier, vol. 138(C), pages 214-237.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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