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Simple Market Equilibria with Rationally Inattentive Consumers

Author

Listed:
  • Alisdair McKay

    (Department of Economics, Boston University)

  • Filip Matejka

    (Center for Economic Research and Graduate Education, Prague)

Abstract

We study a market with rationally inattentive consumers who are unsure of the terms of the offers made by firms, but can acquire information about the terms at a cost. In a symmetric equilibrium, the price set by firms is continuously increasing in the cost of information for consumers and decreasing in the number of firms operating. In addition, favorable a priori information about a firm leads it to set a higher price, and a new entrant can increase demand for incumbents. When consumers have heterogeneous costs of information, firms selling low-quality products may choose to set the highest prices.

Suggested Citation

  • Alisdair McKay & Filip Matejka, 2011. "Simple Market Equilibria with Rationally Inattentive Consumers," Boston University - Department of Economics - Working Papers Series WP2011-025, Boston University - Department of Economics.
    • Handle: RePEc:bos:wpaper:wp2011-025
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    References listed on IDEAS

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