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Strategic pricing with rational inattention to quality

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  • Martin, Daniel

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.

Suggested Citation

  • Martin, Daniel, 2017. "Strategic pricing with rational inattention to quality," Games and Economic Behavior, Elsevier, vol. 104(C), pages 131-145.
    • Handle: RePEc:eee:gamebe:v:104:y:2017:i:c:p:131-145
    DOI: 10.1016/j.geb.2017.03.007
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    More about this item

    Keywords

    Rational inattention; Limited attention; Strategic naïveté; Price signaling;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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