Rigid Pricing and Rationally Inattentive Consumer

CERGE-EI Working Paper Series No. 409

40 Pages Posted: 6 Aug 2010

See all articles by Filip Matějka

Filip Matějka

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: April 1, 2010

Abstract

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.

Keywords: rational inattention, nominal rigidity

JEL Classification: D8, E3

Suggested Citation

Matějka, Filip, Rigid Pricing and Rationally Inattentive Consumer (April 1, 2010). CERGE-EI Working Paper Series No. 409, Available at SSRN: https://ssrn.com/abstract=1653309 or http://dx.doi.org/10.2139/ssrn.1653309

Filip Matějka (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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