Consumer Misperception in a Hotelling Model: With and Without Price Discrimination

This paper studies the implications of consumer misperception in a market fora (horizontally) differentiated product. Two distinct types 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 benefit of one firm's product relativeto the product offered by its competitor. The paper analyzes the implications of misperception for social welfare and consumer surplus. In particular, the effectsof price discrimination are considered for each type of misperception.