Cursed consumers improve social welfare in a Bertrand market

This article analyses a Bertrand game with adverse selection in which consumers are uncertain about firms’ marginal costs and product values. A fraction of buyers are cursed in the sense of cursed equilibrium and exhibit inferential naivety: they underappreciate the information contained in prices about firms’ types and partially neglect the strategic interaction among firms. We first show that in a fully rational benchmark, adverse selection leads only to pooling outcomes and, under our assumptions, can even generate a no-trade equilibrium. We then show that the presence of cursed consumers can implement a simple separating equilibrium. When enough buyers are cursed, low-value firms are deterred from mimicking efficient rivals, prices credibly signal quality, and total surplus can strictly exceed that in the fully rational benchmark. Our analysis identifies explicit thresholds for the fraction of cursed consumers that sustain separation.