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Oren Bar-Gill, Consumer Misperception in a Hotelling Model: With and Without Price Discrimination, 176 J. Inst. & Theoretical Econ. 180 (2020).

Abstract: This paper studies the implications of consumer misperception in a market for a (horizontally) differentiated product. Two distinct type of misperceptions are considered: (i) a common misperception that leads consumers to similarly overestimate the benefit from both firms’ products; and (ii) a relative misperception that leads consumers to overestimate the relative benefit of one firm’s product as compared to the product offered by its competitor. The paper analyzes the implications of misperception for social welfare and consumer surplus. In particular, the effects of price discrimination are considered, for each type of misperception.