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Strategic pricing with rational inattention to quality

Daniel Martin ()

Games and Economic Behavior, 2017, vol. 104, issue C, 131-145

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.

Keywords: Rational inattention; Limited attention; Strategic naïveté; Price signaling (search for similar items in EconPapers)
JEL-codes: D82 D83 D03 C72 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:gamebe:v:104:y:2017:i:c:p:131-145