Competing to Commit: Markets with Rational Inattention
Carlo M. Cusumano, Francesco Fabbri, Ferdinand Pieroth
American Economic Review · 2024 · Volume 114 · Issue 1
Abstract
Two homogeneous-good firms compete for a consumer's unitary demand. The consumer is rationally inattentive and pays entropy costs to process information about firms' offers. Compared to a collusion benchmark, competition produces two effects. As in standard models, competition puts downward pressure on prices. But, additionally, an attention effect arises: the consumer engages in trade more often. This alleviates the commitment problem that firms have when facing inattentive consumers and increases trade efficiency. For high enough attention costs, the attention effect dominates the effect on prices: firms' profits are higher under competition than under collusion.
Keywords
Consumer Economics: Theory, Firm Behavior: Theory, Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Monopoly, Monopolization Strategies
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