American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Quality Is in the Eye of the Beholder: Taste Projection in Markets with Observational Learning
American Economic Review
vol. 114,
no. 11, November 2024
(pp. 3746–87)
Abstract
We study how misperceptions of others' tastes influence beliefs, demand, and prices in markets with observational learning. Consumers infer a good's quality from the quantity demanded and price paid by others. When consumers exaggerate the similarity between their and others' tastes, such "taste projection" generates discrepant quality perceptions, which are decreasing in a projector's taste and increasing in the observed price. These biased inferences produce an excessively elastic market demand. We also analyze dynamic monopoly pricing with short-lived taste-projecting consumers. Optimal pricing follows a declining path: a high initial price inflates future buyers' perceptions, and lower subsequent prices induce overadoption.Citation
Gagnon-Bartsch, Tristan, and Antonio Rosato. 2024. "Quality Is in the Eye of the Beholder: Taste Projection in Markets with Observational Learning." American Economic Review, 114 (11): 3746–87. DOI: 10.1257/aer.20230814Additional Materials
JEL Classification
- D42 Market Structure, Pricing, and Design: Monopoly
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- L15 Information and Product Quality; Standardization and Compatibility