Simple Market Equilibria with Rationally Inattentive Consumers
American Economic Review
vol. 102,
no. 3, May 2012
(pp. 24-29)
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.Citation
Matějka, Filip, and Alisdair McKay. 2012. "Simple Market Equilibria with Rationally Inattentive Consumers." American Economic Review, 102 (3): 24-29. DOI: 10.1257/aer.102.3.24JEL Classification
- D11 Consumer Economics: Theory
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief