Rigid Pricing and Rationally Inattentive Consumer

Filip Matejka

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: This paper proposes a mechanism leading to rigid pricing as an optimal strategy. It applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity. The consumer needs to process information about prices, while the seller is perfectly attentive. It turns out that the seller chooses to price discretely even for a continuous range of unit input costs, i.e. charges a finite set of different prices only. The price usually stays constant when unit input cost changes only a little. The seller does so to provide the consumer with easily observable prices and thus stimulate her to consume more. In the model's dynamic version, this mechanism implies that prices respond to cost shocks with a delay.

Keywords: Rational inattention; nominal rigidity (search for similar items in EconPapers)
JEL-codes: D8 E3 (search for similar items in EconPapers)
Date: 2010-04
New Economics Papers: this item is included in nep-cba and nep-com
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Journal Article: Rigid pricing and rationally inattentive consumer (2015)
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