Do sellers exploit biased beliefs of buyers? An experiment

I study experimental markets in which sellers interact with buyers who have biased beliefs about characteristics of the product sold. I examine whether such buyers can be exploited by sellers through the use of specifically designed pricing structures. Theoretically, I show that a necessary condition for exploitation is consumer naiveté about their belief bias, otherwise they infer their biased beliefs from the sellers' actions. My main experimental result establishes that whether exploitation arises depends on how difficult it is for buyers to make such inferences. When sellers can only make take-it-or-leave-it offers, no exploitation arises. If, however, contracts are agreed upon by bilateral bargaining, sellers earn higher profits compared to the case with unbiased beliefs. I present evidence that in the former case buyers anticipate and prevent exploitation. In the latter case, the richer interaction structure makes it harder for buyers to infer the sellers' incentives, leading to exploitation.