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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.

Suggested Citation

  • Mark Armstrong & Yongmin Chen, 2009. "Inattentive Consumers and Product Quality," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 411-422, 04-05.
  • Handle: RePEc:tpr:jeurec:v:7:y:2009:i:2-3:p:411-422
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    References listed on IDEAS

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    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.
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    8. 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.
    9. Andrei Shleifer, 2004. "Does Competition Destroy Ethical Behavior?," American Economic Review, American Economic Association, vol. 94(2), pages 414-418, May.
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    Citations

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    Cited by:

    1. Dubovik, Andrei & Janssen, Maarten C.W., 2012. "Oligopolistic competition in price and quality," Games and Economic Behavior, Elsevier, vol. 75(1), pages 120-138.
    2. Geoffroy de Clippel & Kfir Eliaz & Kareen Rozen, 2014. "Competing for Consumer Inattention," Journal of Political Economy, University of Chicago Press, vol. 122(6), pages 1203-1234.
    3. Chioveanu, Ioana & Zhou, Jidong, 2009. "Price Competition and Consumer Confusion," MPRA Paper 17340, University Library of Munich, Germany.
    4. Avichai Snir & Daniel Levy, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," Working Papers 2011-03, Bar-Ilan University, Department of Economics.
    5. repec:eee:indorg:v:54:y:2017:i:c:p:239-268 is not listed on IDEAS
    6. Daniel Levy & Avichai Snir, 2013. "Shrinking Goods," Emory Economics 1303, Department of Economics, Emory University (Atlanta).
    7. Chen, Yongmin & Zhang, Tianle, 2011. "Equilibrium price dispersion with heterogeneous searchers," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 645-654.
    8. 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.
    9. Ioana Chioveanu, 2012. "Price and quality competition," Journal of Economics, Springer, vol. 107(1), pages 23-44, September.
    10. Chioveanu, Ioana, 2017. "Prominence, Complexity, and Pricing," MPRA Paper 81078, University Library of Munich, Germany.
    11. Mark Armstrong, 2015. "Search and Ripoff Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 273-302, November.
    12. Schumacher, Heiner, 2014. "Incentives through consumer learning about tastes," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 170-177.
    13. Michel, Christian, 2016. "Market Regulation of Voluntary Add-on Contracts," Annual Conference 2016 (Augsburg): Demographic Change 145892, Verein für Socialpolitik / German Economic Association.
    14. 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.
    15. Nick Vikander, 2014. "Sellouts, Beliefs, and Bandwagon Behavior," Discussion Papers 14-15, University of Copenhagen. Department of Economics.
    16. Schultz, Christian, 2009. "Transparency and product variety," Economics Letters, Elsevier, vol. 102(3), pages 165-168, March.
    17. Inderst, Roman & Obradovits, Martin, 2015. "Too Much Attention on Low Prices? Loss Leading in a Model of Sales with Salient Thinkers," CEPR Discussion Papers 10813, C.E.P.R. Discussion Papers.

    More about this item

    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

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