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Simple Market Equilibria with Rationally Inattentive Consumers

Alisdair McKay () and Filip Matejka

No WP2011-025, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We study a market with rationally inattentive consumers who are unsure of the terms of the offers made by firms, but can acquire information about the terms at a cost. In a symmetric equilibrium, the price set by firms is continuously increasing in the cost of information for consumers and decreasing in the number of firms operating. In addition, favorable a priori information about a firm leads it to set a higher price, and a new entrant can increase demand for incumbents. When consumers have heterogeneous costs of information, firms selling low-quality products may choose to set the highest prices.

Date: 2011-01
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