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American Economic Review Vol. 102 No. 3 2012

Simple Market Equilibria with Rationally Inattentive Consumers

Filip Matějka1; Alisdair McKay2

1 CERGE-EI, Politickych veznu 7, Prague 11121, Czech Republic. CERGE-EI is a joint workplace of the Center for Economic Research and Graduate Education, Charles University, and the Economics Institute of the Academy of Sciences of the Czech Republic. · 2 Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215.

Abstract

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.

DOI
10.1257/aer.102.3.24
Volume
102
Issue
3
Pages
24-29
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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