Price-Based Attention and Welfare

TL;DR

This paper models consumer attention based on price thresholds to analyze welfare effects of price changes, providing a fully characterized model that distinguishes its welfare implications from traditional random utility models.

Contribution

It introduces a novel model of consumer attention based on price thresholds and fully characterizes its welfare implications using observational data.

Findings

Welfare implications differ from random utility models.

Distribution of equivalent variation first-order stochastically dominates.

Model can be identified from observational choice data.

Abstract

To choose between two discrete goods, a consumer pays attention to only those with prices below a threshold. From these, she chooses her most preferred good. We assume consumers in a population have the same preference but may have different thresholds. Similar models of bounded rationality have been studied in the empirical marketing literature. We fully characterize the model, and using observational choice data alone, we identify the welfare implications of a price change. The behavioral content of our model overlaps with an important class of random utility models, but the welfare implications are meaningfully different. The distribution of equivalent variation under our model first-order stochastically dominates that under the random utility model.