Consumer choice under limited attention when options have different information costs

Frank Huettner,, Tamer Boyaci, and Yalcin Akcay
Additional contact information
Frank Huettner,: ESMT European School of Management and Technology
Tamer Boyaci,: ESMT European School of Management and Technology
Yalcin Akcay: College of Administrative Sciences and Economics, Koç University

No ESMT-16-04, ESMT Research Working Papers from ESMT European School of Management and Technology

Abstract: Consumers often do not have complete information about the choices they face and therefore have to spend time and effort in acquiring information. Since information acquisition is costly, consumers have to trade-off the value of better information against its cost, and make their final choices based on imperfect information. We model this decision using the rational inattention approach and describe the rationally inattentive consumer’s choice behavior when she faces options with different information costs. To this end, we introduce an information cost function that distinguishes between direct and inferential information. We then analytically characterize the optimal behavior and derive the choice probabilities in closed-form. We find that non-uniform information costs can have a strong impact on product choice, which gets particularly conspicuous when the product alternatives are otherwise very similar. It can also lead to situations where it is disadvantageous for the seller to provide easier access to information for a particular product. Furthermore, it provides a new explanation for strong failure of regularity of consumer behaviour, which occurs if the addition of an inferior – never chosen – product to the choice set increases the market share of another existing product.

Keywords: discrete choice; rational inattention; information acquisition; non-uniform information costs; strong failure of regularity (search for similar items in EconPapers)
JEL-codes: D40 D80 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-08-18, Revised 2016-10-04
New Economics Papers: this item is included in nep-com, nep-dcm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://static.esmt.org/publications/workingpapers/ESMT-16-04.pdf First version, 2016 (application/pdf)
http://static.esmt.org/publications/workingpapers/ESMT-16-04_R1.pdf Revised version, 2016 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:esm:wpaper:esmt-16-04

Access Statistics for this paper

More papers in ESMT Research Working Papers from ESMT European School of Management and Technology Contact information at EDIRC.
Bibliographic data for series maintained by ESMT Faculty Publications ().