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Contextual Inference in Markets: On the Informational Content of Product Lines

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  • Emir Kamenica
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    Abstract

    Context can influence decisions. This malleability of choice is usually invoked as evidence that people do not maximize stable preference orderings. In a market equilibrium, however, context conveys payoff-relevant information to consumers. Consequently, these consumers rationally violate naïve formulations of standard choice theoretic principles. I identify informational asymmetries under which apparently anomalous behaviors, namely the compromise effect and choice overload, arise as market equilibria. Firms respond to consumers’ contextual inference; in case of the compromise effect, a firm may introduce premium loss leaders (expensive goods of overly high quality that increase the demand for other goods). (JEL D11, D83, M31)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.5.2127
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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 98 (2008)
    Issue (Month): 5 (December)
    Pages: 2127-49

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    Handle: RePEc:aea:aecrev:v:98:y:2008:i:5:p:2127-49

    Note: DOI: 10.1257/aer.98.5.2127
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    Cited by:
    1. Ilyana Kuziemko & Ryan W. Buell & Taly Reich & Michael I. Norton, 2011. ""Last-place Aversion": Evidence and Redistributive Implications," NBER Working Papers 17234, National Bureau of Economic Research, Inc.
    2. Bo Chen, 2013. "Assignment Games with Externalities And Matching-Based Competition," Bonn Econ Discussion Papers bgse08_2013, University of Bonn, Germany.
    3. Gerrit Frackenpohl & Gert Pönitzsch, 2013. "Bundling Public with Private Goods," Bonn Econ Discussion Papers bgse05_2013, University of Bonn, Germany.
    4. Jonathan Levav & Mark Heitmann & Andreas Herrmann & Sheena S. Iyengar, 2010. "Order in Product Customization Decisions: Evidence from Field Experiments," Journal of Political Economy, University of Chicago Press, vol. 118(2), pages 274-299, 04.
    5. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, . "Salience and Consumer Choice," Working Paper 62321, Harvard University OpenScholar.
    6. Spiegler, Ran, 2010. ""But Can't we Get the Same Thing with a Standard Model?" Rationalizing Bounded-Rationality Models," MPRA Paper 21428, University Library of Munich, Germany.
    7. Ortoleva, Pietro, 2008. "The Price of Flexibility: Towards a Theory of Thinking Aversion," MPRA Paper 12242, University Library of Munich, Germany.
    8. Keith M Marzilli Ericson & Amanda Starc, 2013. "How Product Standardization Affects Choice: Evidence from the Massachusetts Health Insurance Exchange," NBER Working Papers 19527, National Bureau of Economic Research, Inc.
    9. Cunningham, Thomas, 2013. "Biases and Implicit Knowledge," MPRA Paper 50292, University Library of Munich, Germany.
    10. Susan Athey & Glenn Ellison, 2009. "Position Auctions with Consumer Search," NBER Working Papers 15253, National Bureau of Economic Research, Inc.
    11. Søren Olsen & Thomas Lundhede & Jette Jacobsen & Bo Thorsen, 2011. "Tough and Easy Choices: Testing the Influence of Utility Difference on Stated Certainty-in-Choice in Choice Experiments," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 49(4), pages 491-510, August.
    12. Rosato, Antonio, 2013. "Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs," MPRA Paper 47168, University Library of Munich, Germany.
    13. John Ashton & Andros Gregoriou & Jerome V. Healy, 2013. "The relative influence of price and choice factors on retail deposit quantities," Working Papers 13006, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    14. Iyengar, Sheena S. & Kamenica, Emir, 2010. "Choice proliferation, simplicity seeking, and asset allocation," Journal of Public Economics, Elsevier, vol. 94(7-8), pages 530-539, August.
    15. Jason T. Abaluck & Jonathan Gruber, 2009. "Choice Inconsistencies Among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," NBER Working Papers 14759, National Bureau of Economic Research, Inc.

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