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American Economic Review: Vol. 98 No. 5 (December 2008)
AER Volume. 98, Issue 5 | 
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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
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)
Article Full-Text Access
Full-text Article
Authors
Kamenica, Emir (U Chicago)
JEL Classifications
D11: Consumer Economics: Theory
D83: Search; Learning; Information and Knowledge; Communication; Belief
M31: Marketing
D83: Search; Learning; Information and Knowledge; Communication; Belief
M31: Marketing
