Rational Inattention as an Empirical Framework for Discrete Choice and Consumer-Welfare Evaluation

Abstract

The conventional discrete-choice model of demand assumes consumers are fully informed about every available product alternative. This assumption is at odds with the long literature studying incomplete information and the role of the consumer’s “evoked set” or “consideration set.” The author develops a novel empirical discrete-choice demand model derived from an underlying theory of consumer’s rational inattention. The model distinguishes between factors that shift demand through the utility function, such as prices and product attributes, and factors that shift demand through the consumer’s information “evaluation costs.” The author conducts an empirical case study of the laundry detergent category. Using a set of exclusion restrictions based on retail promotional instruments, specification tests select the rational inattention model over the conventional full-information discrete-choice model. Exploiting the launch of Tide Pods midway through the sample, the author demonstrates the role of evaluation costs for the measured value creation from a new product. A conventional discrete-choice model always assigns positive incremental consumer value from new products. However, the rational inattention model developed herein finds a decrease in overall consumer welfare from the new Pods products’ entry, with the increased friction in information associated with the larger choice set offsetting the potential gains from higher match value.

Pay more attention to consumers: exploring customer acquisition strategies of large third-party sellers on e-B2C market

“…Prior researchers have largely neglected that TPSs should pay more attention to consumers. In consumers' person-goods matching process, they are motivated to find desired products through various keywords and evaluate a product through the available information in the advertising (Gao et al, 2022;Joo, 2023;Jang et al, 2017;Bronnenberg et al, 2016;Moorthy et al, 1997).…”

“…In consumers’ person-goods matching process, they are motivated to find desired products through various keywords and evaluate a product through the available information in the advertising (Gao et al. , 2022; Joo, 2023; Jang et al. , 2017; Bronnenberg et al.…”

“…Consumers' person-goods matching process refers to the process in which consumers strive to find the most suitable product before making final purchase decisions (Moorthy et al, 1997;Bronnenberg et al, 2016). In this process, consumers have strong motivation to use various keywords to search products and utilize the advertising information to evaluate a product, providing a useful starting point for TPSs to propose effective customer acquisition strategies by matching their motivations (Gao et al, 2022;Joo, 2023;Jang et al, 2017;Bronnenberg et al, 2016;Moorthy et al, 1997). Thus, we develop a comprehensive framework to analyze how large TPSs propose effective customer acquisition strategies to enhance their sales performance in consumers' person-goods matching process.…”

“…In this process, consumers have strong motivation to use various keywords to search products and utilize the advertising information to evaluate a product, providing a useful starting point for TPSs to propose effective customer acquisition strategies by matching their motivations (Gao et al. , 2022; Joo, 2023; Jang et al. , 2017; Bronnenberg et al.…”

The role of perceived Islamic value of advertisement in purchase intention: Mediation effect of advertisement value

“…A recurring debate in the realm of consumer behaviour centres on the rationality versus emotional aspect of decision-making. On one hand, conventional marketing theories posit that consumers primarily base their choices on rational assessments of a product's functional attributes, emphasizes efficiency and utility as the primary drivers of consumption decisions, as exemplified by evaluating the mileage of a car (Bhat & Reddy, 1998;Joo, 2023;Muzayyanah et al, 2023;Rokka & Uusitalo, 2008). On the other hand, alternative theories, contend that consumers are not solely motivated by rationality; rather, they often make purchases to express their self-identity and emotions (Holbrook, 1981;Holbrook & Hirschman, 1982;Lee, 2003;Malone & McCabe, 2023;Verplanken & Sato, 2011).…”