American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Contextual Inference in Markets: On the Informational Content of Product Lines
American Economic Review
vol. 98,
no. 5, December 2008
(pp. 2127–49)
Abstract
Context can influence decisions. This malleability of choice is usually invoked as evidence that people do not maximize stable preference orderings. In a market equilibrium, however, context conveys payoff-relevant information to consumers. Consequently, these consumers rationally violate naïve formulations of standard choice theoretic principles. I identify informational asymmetries under which apparently anomalous behaviors, namely the compromise effect and choice overload, arise as market equilibria. Firms respond to consumers’ contextual inference; in case of the compromise effect, a firm may introduce premium loss leaders (expensive goods of overly high quality that increase the demand for other goods). (JEL D11, D83, M31)Citation
Kamenica, Emir. 2008. "Contextual Inference in Markets: On the Informational Content of Product Lines." American Economic Review, 98 (5): 2127–49. DOI: 10.1257/aer.98.5.2127JEL Classification
- D11 Consumer Economics: Theory
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- M31 Marketing