Strategic pricing with rational inattention to quality

Research output: Contribution to journalArticle

11 Scopus citations

Abstract

Using a standard strategic pricing game, I determine how sellers set prices when facing buyers who are “rationally inattentive” to information about product quality. Two cases are studied: strategically sophisticated buyers who are rationally inattentive to exogenous information about quality and strategically naïve buyers who are rationally inattentive to strategic information about quality. In both cases, there exists an equilibrium where high quality sellers price high and low quality sellers mimic them by pricing high with a positive probability. This mimicking rate is uniquely identified and determines the informativeness of prices. In general, a drop in the marginal cost of attention results in more informative prices, but I identify conditions for which a drop in the marginal cost of attention can result in less informative prices.

Original languageEnglish (US)
Pages (from-to)131-145
Number of pages15
JournalGames and Economic Behavior
Volume104
DOIs
StatePublished - Jul 1 2017

Keywords

  • Limited attention
  • Price signaling
  • Rational inattention
  • Strategic naïveté

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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