Competitive Markets with Imperfectly Discerning Consumers
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arXiv
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| Format: | Preprint |
| Published: |
2024
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| _version_ | 1866909322890444800 |
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| author | Spiegler, Yair Antler ad Ran |
| author_facet | Spiegler, Yair Antler ad Ran |
| contents | 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. We leverage this representation to characterize equilibrium headline prices, add-on charges and welfare. Market responses to shocks display patterns that are impossible under rational expectations. For example, equilibrium prices can be fully revealing and yet vary with consumers' private information. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2409_14885 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Competitive Markets with Imperfectly Discerning Consumers Spiegler, Yair Antler ad Ran Theoretical Economics 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. We leverage this representation to characterize equilibrium headline prices, add-on charges and welfare. Market responses to shocks display patterns that are impossible under rational expectations. For example, equilibrium prices can be fully revealing and yet vary with consumers' private information. |
| title | Competitive Markets with Imperfectly Discerning Consumers |
| topic | Theoretical Economics |
| url | https://arxiv.org/abs/2409.14885 |