Simple Market Equilibria with Rationally Inattentive Consumers
Matějka, Filip, and
Alisdair McKay. 2012. "Simple Market Equilibria with Rationally Inattentive Consumers."
American Economic Review,
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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Matějka, Filip (CERGE-EI, Prague)
McKay, Alisdair (Boston U)
D11: Consumer Economics: Theory
D81: Criteria for Decision-Making under Risk and Uncertainty
D83: Search; Learning; Information and Knowledge; Communication; Belief