Rigid pricing and rationally inattentive consumer

Filip Matejka

Journal of Economic Theory, 2015, vol. 158, issue PB, 656-678

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 the realized price, while the seller is perfectly attentive. The seller chooses to price rigidly, i.e. prices respond to changes in the unit input cost less than if the consumer was perfectly attentive. The rigidity is sometimes manifested by discreteness of prices – the seller charges a finite set of different prices even for a continuous range of unit input costs. The seller does so to provide the consumer with easily observable prices, which stimulates her to consume more and increases the seller's profit.

Keywords: Rational inattention; Imperfect information; Nominal rigidity (search for similar items in EconPapers)
JEL-codes: D83 E3 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Rigid Pricing and Rationally Inattentive Consumer (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:158:y:2015:i:pb:p:656-678

DOI: 10.1016/j.jet.2015.01.021

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