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Inattentive Consumers and Product Quality

  • Armstrong, Mark
  • Chen, Yongmin

This 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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4797.

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Date of creation: Sep 2007
Date of revision:
Handle: RePEc:pra:mprapa:4797
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  1. Andrei Shleifer, 2004. "Does Competition Destroy Ethical Behavior?," NBER Working Papers 10269, National Bureau of Economic Research, Inc.
  2. repec:tpr:qjecon:v:120:y:2005:i:2:p:585-637 is not listed on IDEAS
  3. repec:bla:restud:v:44:y:1977:i:3:p:493-510 is not listed on IDEAS
  4. Yuk-Shee Chan & Hayne Leland, 1982. "Prices and Qualities in Markets with Costly Information," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 499-516.
  5. Glenn Ellison, 2004. "A Model of Add-on Pricing," Economics Working Papers 0049, Institute for Advanced Study, School of Social Science.
  6. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 505-540.
  7. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 505-540.
  8. 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.
  9. S. Dellavigna., 2011. "Psychology and Economics: Evidence from the Field," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
  10. 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.
  11. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  12. Steven C. Salop & Joseph E. Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
  13. 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.
  14. 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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