Good Unsystematic Mistakes

We study the effects of consumers' unsystematic perception mistakes on market outcomes and consumer welfare. In the model, two firms produce goods of different quality and compete by choosing prices. Consumers observe the qualities and/or the prices with noise and make choice mistakes as a result. When the magnitude of mistakes grows, the lower‐quality firm increases its price while the higher‐quality firm initially reduces its price before increasing it. We show that this price reduction effect is so strong that consumers eventually benefit from making a small amount of unsystematic mistakes despite the sub‐optimal choices and the increasing price of the lower‐quality firm.