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Inattentive Consumers and Product Quality

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  • Mark Armstrong
  • Yongmin Chen

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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Bibliographic 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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References

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  1. Gabaix, Xavier & Laibson, David I., 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  2. Andrei Shleifer, 2004. "Does Competition Destroy Ethical Behavior?," American Economic Review, American Economic Association, vol. 94(2), pages 414-418, May.
  3. S. Dellavigna., 2011. "Psychology and Economics: Evidence from the Field," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
  4. Glenn Ellison, 2003. "A Model of Add-on Pricing," NBER Working Papers 9721, National Bureau of Economic Research, Inc.
  5. 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.
  6. Chan, Yuk-Shee & Leland, Hayne, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 499-516, October.
  7. 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.
  8. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  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.
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Citations

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Cited by:
  1. Avichai Snir & Daniel Levy, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," Emory Economics 1104, Department of Economics, Emory University (Atlanta).
  2. Chen, Yongmin & Zhang, Tianle, 2011. "Equilibrium price dispersion with heterogeneous searchers," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 645-654.
  3. Karle, Heiko & Peitz, Martin, 2010. "Pricing and Information Disclosure in Markets with Loss-Averse Consumers," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 312, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Chioveanu, Ioana & Zhou, Jidong, 2009. "Price Competition and Consumer Confusion," MPRA Paper 17340, University Library of Munich, Germany.
  5. Daniel Levy & Avichai Snir, 2013. "Shrinking Goods," Emory Economics 1303, Department of Economics, Emory University (Atlanta).
  6. Ioana Chioveanu, 2012. "Price and quality competition," Journal of Economics, Springer, vol. 107(1), pages 23-44, September.
  7. Geoffroy de Clippel & Kfir Elias & Kareen Rozen, 2013. "Competing for Consumer Inattention," Cowles Foundation Discussion Papers 1901, Cowles Foundation for Research in Economics, Yale University.
  8. Christian Schultz, 2007. "Transparency and Product Variety," CIE Discussion Papers 2007-13, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  9. Dubovik, Andrei & Janssen, Maarten C.W., 2012. "Oligopolistic competition in price and quality," Games and Economic Behavior, Elsevier, vol. 75(1), pages 120-138.
  10. Nagler, Matthew G. & Kronenberg, Fredi & Kennelly, Edward J. & Jiang, Bei & Ma, Chunhui, 2010. "The use of indicators for unobservable product qualities: inferences based on consumer sorting," MPRA Paper 28409, University Library of Munich, Germany.

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