Pricing When Customers Have Limited Attention

43 Pages Posted: 3 Mar 2016 Last revised: 25 Jan 2017

See all articles by Tamer Boyaci

Tamer Boyaci

ESMT European School of Management and Technology

Yalcin Akcay

Koc University

Date Written: January 19, 2017

Abstract

We study the optimal pricing problem of a monopolistic firm facing customers with limited attention and capability to process information about the value (quality) of a single offered product. We model customer choice based on the theory of rational inattention in the economics literature, which enables us to capture not only the impact of true quality and price, but also the intricate effects of customer’s prior beliefs and cost of information acquisition and processing. We formulate the firm’s price optimization problem assuming that the firm can also use the price to signal the quality of the product to customers. To delineate the economic incentives of the firm, we first characterize the pricing and revenue implications of customer’s limited attention without signalling, and then use these results to explore Perfect Bayesian Equilbiria (PBE) of the strategic pricing signalling game. As an extension, we consider heterogeneous customers with different information costs as well as prior beliefs. We discuss the managerial implications of our key findings and prescribe insights regarding information provision and product positioning.

Keywords: Pricing, choice behavior, rational inattention, information acquisition, signalling game

Suggested Citation

Boyaci, Tamer and Akcay, Yalcin, Pricing When Customers Have Limited Attention (January 19, 2017). ESMT Working Paper No. 16-01 (R2). Available at SSRN: https://ssrn.com/abstract=2741088 or http://dx.doi.org/10.2139/ssrn.2741088

Tamer Boyaci (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin, 10178
Germany

HOME PAGE: http://https://www.esmt.org/tamer-boyaci

Yalcin Akcay

Koc University ( email )

Rumelifeneri Yolu
34450 Saryer
Istanbul, 34450
Turkey

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