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Inattentive Consumers and Product Quality

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Author Info
Mark Armstrong
Yongmin Chen

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Abstract

We present a model in which some consumers shop on the basis of price alone, without paying attention to product quality. A firm may "cheat" and offer a worthless product to exploit these inattentive consumers. In the unique symmetric equilibrium, firms follow a mixed strategy involving both price and quality dispersion. The presence of inattentive consumers harms attentive consumers, and enables firms to earn positive profits. With many sellers, approximately half of them will cheat. A market transparency policy which boosts the number of attentive consumers will make firms less inclined to cheat, which improves welfare, but the impact of the policy on profit and consumer surplus is ambiguous. (JEL: D18, L13, L15) (c) 2009 by the European Economic Association.

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Publisher Info
Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 7 (2009)
Issue (Month): 2-3 (04-05)
Pages: 411-422
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Handle: RePEc:tpr:jeurec:v:7:y:2009:i:2-3:p:411-422

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Find related papers by JEL classification:
D18 - Microeconomics - - Household Behavior - - - Consumer Protection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier. [Downloadable!] (restricted)
  2. Andrei Shleifer, 2004. "Does Competition Destroy Ethical Behavior?," American Economic Review, American Economic Association, vol. 94(2), pages 414-418, May. [Downloadable!]
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  3. Chan, Yuk-Shee & Leland, Hayne, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Blackwell Publishing, vol. 49(4), pages 499-516, October. [Downloadable!] (restricted)
  4. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May. [Downloadable!] (restricted)
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  5. Glenn Ellison, 2004. "A Model of Add-on Pricing," Economics Working Papers 0049, Institute for Advanced Study, School of Social Science. [Downloadable!]
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  6. David Dranove & Mark A. Satterthwaite, 1992. "Monopolistic Competition When Price and Quality are Imperfectly Observable," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 518-534, Winter. [Downloadable!] (restricted)
  7. Stefano DellaVigna, 2007. "Psychology and Economics: Evidence from the Field," NBER Working Papers 13420, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September. [Downloadable!] (restricted)
  9. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September. [Downloadable!] (restricted)
  10. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-46, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chioveanu, Ioana & Zhou, Jidong, 2009. "Price Competition and Consumer Confusion," MPRA Paper 17340, University Library of Munich, Germany. [Downloadable!]
  2. Christian Schultz, 2009. "Collusion in markets with imperfect price information on both sides," CIE Discussion Papers 2009-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
  3. Christian Schultz, 2007. "Transparency and Product Variety," CIE Discussion Papers 2007-13, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
  4. Chen, Yongmin & Zhang, Tianle, 2009. "Equilibrium price dispersion with heterogeneous searchers," MPRA Paper 16490, University Library of Munich, Germany. [Downloadable!]
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