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American Economic Review: Vol. 98 No. 5 (December 2008)

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Contextual Inference in Markets: On the Informational Content of Product Lines

Article 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.98.5.2127

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)

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Authors

Kamenica, Emir (U Chicago)

JEL Classifications

D11: Consumer Economics: Theory
D83: Search; Learning; Information and Knowledge; Communication; Belief
M31: Marketing


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