Inattentive Consumers and Product Quality
AbstractThis paper studies a model in which some consumers shop on the basis of price alone, without attention to potential differences in product quality. A firm may offer a low-quality product to exploit these inattentive consumers. In the unique symmetric equilibrium of the model, firms choose prices with mixed strategies, similarly to Varian (1980) in which some consumers purchase from a random seller without attention to market prices. In our model, though, firms also choose quality stochastically, and there is both price and quality dispersion. Two stylized policy interventions are considered: competition policy, which acts to increase the number of sellers, and market transparency reforms which act to increase the fraction of attentive consumers. With fewer inattentive consumers, firms are less likely to "cheat" (i.e., cut quality) which therefore improves welfare, but profit and consumer surplus can either increase or decrease. When there is a large number of sellers, approximately half the sellers cheat (regardless of the fraction of inattentive consumers), and introducing more sellers boosts consumers surplus and reduces profit, while the impact on welfare is ambiguous.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 4797.
Date of creation: Sep 2007
Date of revision:
Oligopoly; Complex Products; Market transparency; Competition Policy;
Other versions of this item:
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-16 (All new papers)
- NEP-COM-2007-09-16 (Industrial Competition)
- NEP-MIC-2007-09-16 (Microeconomics)
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.:
- Stefano DellaVigna, 2009.
"Psychology and Economics: Evidence from the Field,"
Journal of Economic Literature,
American Economic Association, vol. 47(2), pages 315-72, June.
- 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.
- Andrei Shleifer, 2004.
"Does Competition Destroy Ethical Behavior?,"
NBER Working Papers
10269, National Bureau of Economic Research, Inc.
- 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.
- Gabaix, Xavier & Laibson, David I., 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
- Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
- Glenn Ellison, 2003.
"A Model of Add-on Pricing,"
NBER Working Papers
9721, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
- 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.
- Avichai Snir & Daniel Levy, 2011.
"Shrinking Goods and Sticky Prices: Theory and Evidence,"
Working Paper Series
17_11, The Rimini Centre for Economic Analysis.
- Snir, Avichai & Levy, Daniel, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," MPRA Paper 29565, University Library of Munich, Germany.
- Avichai Snir & Daniel Levy, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," Emory Economics 1104, Department of Economics, Emory University (Atlanta).
- Avichai Snir & Daniel Levy, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," Working Papers 2011-03, Department of Economics, Bar-Ilan University.
- Daniel Levy & Avichai Snir, 2013.
1303, Department of Economics, Emory University (Atlanta).
- Chen, Yongmin & Zhang, Tianle, 2009.
"Equilibrium price dispersion with heterogeneous searchers,"
16490, University Library of Munich, Germany.
- Chen, Yongmin & Zhang, Tianle, 2011. "Equilibrium price dispersion with heterogeneous searchers," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 645-654.
- Christian Schultz, 2007.
"Transparency and Product Variety,"
CIE Discussion Papers
2007-13, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
- Andrei Dubovik & Maarten C.W. Janssen, 2008.
"Oligopolistic Competition in Price and Quality,"
Tinbergen Institute Discussion Papers
08-068/1, Tinbergen Institute.
- 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.
- de Clippel, Geoffroy & Eliaz, Kfir & Rozen, Kareen, 2013. "Competing for Consumer Inattention," CEPR Discussion Papers 9553, C.E.P.R. Discussion Papers.
- Geoffroy De Clippel & Kfir Eliaz & Kareen Rozen, 2013. "Competing for Consumer Inattention," Levine's Working Paper Archive 786969000000000765, David K. Levine.
- Karle, Heiko & Peitz, Martin, 2010.
"Pricing and Information Disclosure in Markets with Loss-Averse Consumers,"
CEPR Discussion Papers
7785, C.E.P.R. Discussion Papers.
- 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.
- 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.
- Ioana Chioveanu, 2012.
"Price and quality competition,"
Journal of Economics,
Springer, vol. 107(1), pages 23-44, September.
- Chioveanu, Ioana & Zhou, Jidong, 2009.
"Price Competition and Consumer Confusion,"
17340, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.