Competing to Commit: Markets with Rational Inattention

Carlo Cusumano, Francesco Fabbri and Ferdinand Pieroth

American Economic Review, 2024, vol. 114, issue 1, 285-306

Abstract: Two homogeneous-good firms compete for a consumer's unitary demand. The consumer is rationally inattentive and pays entropy costs to process information about firms' offers. Compared to a collusion benchmark, competition produces two effects. As in standard models, competition puts downward pressure on prices. But, additionally, an attention effect arises: the consumer engages in trade more often. This alleviates the commitment problem that firms have when facing inattentive consumers and increases trade efficiency. For high enough attention costs, the attention effect dominates the effect on prices: firms' profits are higher under competition than under collusion.

JEL-codes: D11 D21 D43 D83 L12 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/aer.20221605

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