Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282057 
Year of Publication: 
2022
Series/Report no.: 
Discussion Paper No. 365
Publisher: 
Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition, München und Berlin
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 which 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 favourable offers in order to meet biased consumers' unreasonable high expectations which then become partially self-fulfilling. Consequently, the presence of biased consumers may improve the welfare of all consumers.
Subjects: 
consumer search
bounded rationality
cursed beliefs
JEL: 
D18
D21
D43
D83
Document Type: 
Working Paper

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