Competition in schedules with cursed traders

Abstract

We study a market with sellers that compete in supply functions, face an elastic demand, and have imperfect cost information. In our model, sellers neglect some informational content of the price. In order to capture this feature, we use the cursed expectations equilibrium concept. In the linear-quadratic-normal framework, this paper presents conditions under which the unique equilibrium in linear supply functions exists and derives some comparative statics results. Compared to markets with fully rational sellers, we find that market power and the expected price-cost margin are lower; the price reaction to private information can be higher due to imperfect competition and demand elasticity; expected profits can be greater; and expected total surplus can also increase if the efficiency gains from reduced market power outweigh the losses from cursedness.