Rigid Pricing and Rationally Inattentive

Filip Matejka

No 749, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: This paper proposes a mechanism leading to rigid pricing as an opti- mal 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 prices, while the seller is perfectly attentive. It turns out that the seller chooses to price discretely even for a continuous range of unit input costs, i.e. charges a finite set of distinct prices only. The price usually stays constant when unit input cost changes only a little. The seller does so to provide the consumer with easily observable prices and thus stimulate her to consume more.

Date: 2011
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Citations: View citations in EconPapers (6)

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