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