Multicomponent Systems Pricing: Rational Inattention and Downward Rigidities

Abstract

The authors examine the relative magnitude of price reductions for product systems and their constituent components (e.g., cameras, computers, monitors, lenses) and hypothesize that these price reductions systematically vary across different types of systems. The authors offer rational inattention as an explanation and document patterns of downward rigidity in online prices of computers and cameras that are consistent with this view. Their basic argument is that under certain circumstances, it is rational for consumers to ignore small price changes. This results in some price rigidity because firms would see no demand effect for small reductions. The authors suggest that this inattention systematically varies across different types of multicomponent systems, leading to specific hypotheses about sellers' pricing behavior. They first check the validity of their theoretical arguments using data from two surveys of consumers and managers. They then examine 669,557 daily price listings for 1052 high-end cameras and computers from 102 online vendors and find evidence consistent with their predictions. Using publicly available web traffic data, the authors also find that their predicted pricing behavior is aligned with better traffic response for the firm.

Keywords: rational inattention, systems, components, pricing, price rigidity, price reductions, e-commerce