Quality Choice in Information-Intensive Goods: The Significance of Education and Income

Abstract

Analyzing differences in the quality of information-intensive goods may require information processing from consumers. Focusing on the differences between organic and conventional milk, we propose analyzing such markets using a tractable micro-founded discrete choice framework with Rational Inattention, non-homothetic preferences, and heterogeneous consumers. We predict theoretically and confirm empirically that consumers with higher efficiency of information processing (EIP) choose higher quality goods than those with lower EIP; however, this does not hold for poorer consumers for whom budget constraints are binding. Similarly, choosing higher quality increases with income, but the effect is weak without sufficiently high EIP.

Keywords: Information Processing, Rational Inattention, Heterogenous Consumers, Organic Milk