Contextual Inference in Markets: On the Informational Content of Product Lines

Emir Kamenica

American Economic Review, 2008, vol. 98, issue 5, 2127-49

Abstract: Context can influence decisions. This malleability of choice is usually invoked as evidence that people do not maximize stable preference orderings. In a market equilibrium, however, context conveys payoff-relevant information to consumers. Consequently, these consumers rationally violate naïve formulations of standard choice theoretic principles. I identify informational asymmetries under which apparently anomalous behaviors, namely the compromise effect and choice overload, arise as market equilibria. Firms respond to consumers’ contextual inference; in case of the compromise effect, a firm may introduce premium loss leaders (expensive goods of overly high quality that increase the demand for other goods). (JEL D11, D83, M31)

JEL-codes: D11 D83 M31 (search for similar items in EconPapers)
Date: 2008
Note: DOI: 10.1257/aer.98.5.2127
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Citations: View citations in EconPapers (114)

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