Rigid pricing and rationally inattentive consumer

0342782 - NHÚ 2011 RIV CZ eng J - Journal Article
Matějka, Filip
Rigid pricing and rationally inattentive consumer.
CERGE-EI Working Paper Series. Roč. 20, č. 2 (2010), s. 1-40. ISSN 1211-3298
R&D Projects: GA MŠMT LC542
Institutional research plan: CEZ:AV0Z70850503
Keywords : rational inattention * nominal rigidity
Subject RIV: AH - Economics
http://www.cerge-ei.cz/pdf/wp/Wp409.pdf

This paper proposes a mechanism leading to rigid pricing as an optimal strategy. It applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity. The consumer needs to process information about prices, while the seller is perfectly attentive. It turns out that the seller chooses to price discretely even for a continuous range of unit input costs, i.e. charges a finite set of different prices only. The price usually stays constant when unit input cost changes only a little. The seller does so to provide the consumer with easily observable prices and thus stimulate her to consume more. In the model's dynamic version, this mechanism implies that prices respond to cost shocks with a delay.
Permanent Link: http://hdl.handle.net/11104/0185415