Arbeitspapier

Consumer choice under limited attention when options have different information costs

Consumers often do not have complete information about the choices they face and therefore have to spend time and effort in acquiring information. Since information acquisition is costly, consumers have to trade-off the value of better information against its cost, and make their final choices based on imperfect information. We model this decision using the rational inattention approach and describe the rationally inattentive consumer's choice behavior when she faces options with different information costs. To this end, we introduce an information cost function that distinguishes between direct and inferential information. We then analytically characterize the optimal behavior and derive the choice probabilities in closed-form. We find that non-uniform information costs can have a strong impact on product choice, which gets particularly conspicuous when the product alternatives are otherwise very similar. It can also lead to situations where it is disadvantageous for the seller to provide easier access to information for a particular product. Furthermore, it provides a new explanation for strong failure of regularity of consumer behaviour, which occurs if the addition of an inferior - never chosen - product to the choice set increases the market share of another existing product.

Language: Englisch

Bibliographic citation: Series: ESMT Working Paper ; No. 16-04

Classification: Management

Subject: discrete choice
rational inattention
information acquisition
non-uniform information costs
strong failure of regularity

Event: Geistige Schöpfung

(who): Hüttner, Frank
Boyacı, Tamer
Akçay, Yalçın

Event: Veröffentlichung

(who): European School of Management and Technology (ESMT)

(where): Berlin

(when): 2016

Handle: http://hdl.handle.net/10419/145133

Last update: 10.03.2025, 11:43 AM CET

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Object type

Arbeitspapier

Associated

Hüttner, Frank
Boyacı, Tamer
Akçay, Yalçın
European School of Management and Technology (ESMT)

Time of origin

2016

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