Simple Market Equilibria with Rationally Inattentive Consumers

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Abstract:

We study a market with rationally inattentive consumers who are unsure of the terms of the offers made by firms, but can acquire information about the terms at a cost. In a symmetric equilibrium, the price set by firms is continuously increasing in the cost of information for consumers and decreasing in the number of firms operating. In addition, favorable a priori information about a firm leads it to set a higher price, and a new entrant can increase demand for incumbents. When consumers have heterogeneous costs of information, firms selling low-quality products may choose to set the highest prices.

Document Type: Research Article

DOI: http://dx.doi.org/10.1257/aer.102.3.24

Publication date: May 1, 2012

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