Consumer Choice Under Limited Attention When Alternatives Have Different Information Costs

Frank Huettner (), Tamer Boyacı () and Yalçın Akçay ()
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Frank Huettner: ESMT Berlin, 10178 Berlin, Germany
Tamer Boyacı: Melbourne Business School, University of Melbourne, Carlton, Victoria 3053, Australia
Yalçın Akçay: Melbourne Business School, University of Melbourne, Carlton, Victoria 3053, Australia

Operations Research, 2019, vol. 67, issue 3, 671-699

Abstract: Consumers often do not have complete information about the choices they face and, therefore, have to spend time and effort acquiring information. Because information acquisition is costly, consumers trade off the value of better information against its cost and make their final product choices based on imperfect information. We model this decision using the rational inattention approach and describe the rationally inattentive consumer’s choice behavior when the consumer faces alternatives with different information costs. To this end, we introduce an information cost function that distinguishes between direct and implied information. We then analytically characterize the optimal choice probabilities. We find that nonuniform information costs can have a strong impact on product choice, which gets particularly conspicuous when the product alternatives are otherwise very similar. There are significant implications on how a seller should provide information about its products and how changes to the product set impacts consumer choice. For example, nonuniform information costs can lead to situations in which it is disadvantageous for the seller to provide easier access to information for a particular product and to situations in which the addition of an inferior (never chosen) product increases the market share of another existing product (i.e., failure of regularity). We also provide an algorithm to compute the optimal choice probabilities and discuss how our framework can be empirically estimated from suitable choice data.

Keywords: discrete choice; rational inattention; information acquisition; nonuniform information costs; market inference (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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