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American Economic Review: Vol. 102 No. 3 (May 2012)

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Simple Market Equilibria with Rationally Inattentive Consumers

Article 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.102.3.24

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.

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Authors

Matějka, Filip (CERGE-EI, Prague)
McKay, Alisdair (Boston U)

JEL Classifications

D11: Consumer Economics: Theory
D81: Criteria for Decision-Making under Risk and Uncertainty
D83: Search; Learning; Information and Knowledge; Communication; Belief


American Economic Review


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