By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.
We study misperceptions of private-signal correlation in an incomplete-information
Cournot duopoly game. Exaggerating the correlation between players’ demand signals is
beneficial when agents hold flexible beliefs about price elasticity, but harmful when their
beliefs are dogmatically correct. For agents with flexible beliefs who learn elasticity by
observing prices, correlation misperceptions indirectly distort behavior through elasticity
misinference. If agents know the true elasticity, this learning channel is eliminated.
Correlation misperceptions have opposite direct and indirect effects on behavior, so the
presence of elasticity inference can reverse an error’s viability.
