Self Satisfying Equilibria and Online Shopping!
Recently, while I was shopping for dresses, I noticed that there were many websites that seemingly sold the exact same dress. I would find a dress that I really liked, then after reverse image searching the pictures of the dress, would find that other websites listed the same dress in their catalogs. After attending the lecture related to good cars, bad cars, lemons, and self fulfilling equilibria, I found a similarity between the contents of that lecture and my dress conundrum.
To make things easier, let’s say that I found a dress being sold on two different websites, both for the same price. The photos used to advertise the dress were exactly the same (clearly, one of the dresses had been the original dress and the other one was a dupe), so it was impossible to know their actual quality. When I thought about whether or not to place an order, I would end up taking into account the expected value of the dress I would actually end up receiving. Let’s say that out of the two websites, I thought one of them would be good quality and the other would be bad quality. Each website had an equal chance of being one or the other. Personally, I value good quality dresses at $60 and bad quality dresses at $24. My expected value for buying a dress would be 60*1/2+24*1/2=42. This means that I would buy from one of the websites if they both listed the dress for $42 or below. From the lecture on self fulfilling equilibria, I know that if there is in fact a good quality dress on one of the websites, then the price listed must be at least the high quality dress seller’s value for the high quality dress. Let’s suppose the high quality dress seller values his dress for $40. In this case, both high and low quality dresses are sold and this constitutes a self fulfilling equilibrium. Then I can place an order.
Now, let’s say there were lemons in the dress market instead of bad quality dresses. In this case, lemons would be when the dresses are a complete scam and they are never delivered. I value good quality dresses at $60 and lemons for $0. My expected value for buying a dress would be 60*1/2+0*1/2=30. However, we know from before that the high quality dress seller values his for $40, which is more than $30. This means that this is not a self fulfilling equilibrium and I cannot order.