Quality Is in the Eye of the Beholder: Taste Projection in Markets with Observational Learning
Tristan Gagnon-Bartsch, Antonio Rosato
American Economic Review · 2024 · Volume 114 · Issue 11
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.
Keywords
Market Structure, Pricing, and Design: Monopoly, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, Information and Product Quality, Standardization and Compatibility
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