Lukas Wenner, University College London

Exploiting Biased Beliefs - A Laboratory Investigation
Monday, 25 January 2016 - 11:30 am to 1:00 pm
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Yazid Dissou
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Free of charge
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In many markets, consumers have incorrect perceptions about the characteristics of products or contractual terms. An important question is how this affects market outcomes, because firms might find ways to take advantage of such biased beliefs. While there are a number of theoretical models that predict exploitation of boundedly rational consumers, direct empirical evidence of these effects is scarce. In this paper I design a laboratory experiment where I induce biased beliefs for subjects in the role of buyers, whereas sellers receive information to correct their bias. In two different scenarios, I study whether the sellers can exploit this belief asymmetry to their advantage, compared to a control treatment in which both parties have equally accurate beliefs. The results show that despite successfully inducing meaningful belief differences, by and large, these do not lead to higher payoffs for sellers.  I present evidence  that it is the biased buyers who manage to protect themselves from being exploited, rather than sellers failing to price optimally which drives this result.