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Higher-Order Beliefs and (Mis)learning from Prices

Author

Listed:
  • Kevin He
  • Jonathan Libgober

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 is 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.

Suggested Citation

  • Kevin He & Jonathan Libgober, 2026. "Higher-Order Beliefs and (Mis)learning from Prices," American Economic Journal: Microeconomics, American Economic Association, vol. 18(3), pages 105-147, August.
    • Handle: RePEc:aea:aejmic:v:18:y:2026:i:3:p:105-47
    DOI: 10.1257/mic.20240346
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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