Armstrong, M.; Chen, Y.; (2008) Inattentive consumers and product quality. (Discussion Papers in Economics 07-03). Department of Economics, University College London: London, UK.

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Abstract

This paper presents a model in which some consumers shop on the basis of price alone, without attention to product quality. A firm may “cheat” (i.e., cut quality) to exploit these inattentive consumers. In the unique symmetric equilibrium, firms follow a mixed strategy involving both price and quality dispersion. Firms are less likely to cheat when there are fewer inattentive consumers, which improves welfare, but the impact on profit and consumer surplus is ambiguous. With many sellers, approximately half of them cheat, and introducing more sellers boosts consumers surplus and reduces profit, while the impact on welfare is ambiguous.

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