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Limited Attention and Choice

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  • Karen Kaiser

Abstract

This paper analyzes a boundedly rational decision maker who is uncertain about his preference and faces the following trade-off: adding a good to the choice set has a positive option value but increases the complexity of the choice problem. The increased complexity is modeled as a reduction of the information available for each good. Because of this trade-off there is an optimal number of goods that the decision maker wants to analyze before making his final choice. The choice of the optimal set can be interpreted as the choice among stores. Stores maximize profits and choose a quality, an assortment, and a price. A lower cost of providing quality implies higher price and higher quality. Assortment will be small for very high levels of quality. Better quality of information implies greater variety and higher price. Greater variety combined with good consumer service can be a signal for high quality of the store.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B40528184-3AC9-E6C0-BDD7-7212D4944F2C%7D.pdf
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Bibliographic Info

Paper provided by Banco de México in its series Working Papers with number 2010-02.

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Date of creation: Mar 2010
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Handle: RePEc:bdm:wpaper:2010-02

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Web page: http://www.banxico.org.mx
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Related research

Keywords: Decision making; Bounded rationality; Choice set; Stores; Quality.;

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  1. Gabaix, Xavier & Laibson, David Isaac & Moloche, Guillermo & Stephen, Weinberg, 2003. "The allocation of attention: theory and evidence," MPRA Paper 47339, University Library of Munich, Germany.
  2. Hauser, John R & Wernerfelt, Birger, 1990. " An Evaluation Cost Model of Consideration Sets," Journal of Consumer Research, University of Chicago Press, vol. 16(4), pages 393-408, March.
  3. Jacoby, Jacob & Speller, Donald E & Berning, Carol A Kohn, 1974. " Brand Choice Behavior as a Function of Information Load: Replication and Extension," Journal of Consumer Research, University of Chicago Press, vol. 1(1), pages 33-42, June.
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