Consumer education: why the market doesn’t work

A growing literature studies the interactions between fully rational profit maximizing firms, on one side, and biased consumers, on the other side. Along these lines, this paper focuses on the consequences of quality misperception on the market equilibrium, by raising the following question: when quality bias affects consumer choice, do firms have incentives to educate their competitor’s customers in order to attract them? To tackle this issue, I incorporate consumer misperception in a Cournot-type duopoly model and consider the consequences on the market outcome. I focus on the two polar cases, when both firms either exploit consumer misperception, or educate completely their rival’s customers. I show that the market exerts conflicting forces on the firms’ incentives, such as a curse of debiasing might occur even in the presence of substitute goods. Consequently, the opportunity of a legal intervention to trigger consumer education is a key issue.