Strategic pricing with rational inattention to quality

In a standard sequential pricing game, I model how buyers attend to information about product quality when prices are easily observable using ìrational inattentionî theory (Sims [2003]). Rational inattention in this setting produces two possible equilibria: one where the entire surplus goes to buyers and one where most of the surplus goes to sellers of high quality goods. I show that there are large di§erences in how policy interventions related to attention impact buyer welfare in each equilibrium. In a laboratory experiment where buyers face real attentional costs, I Önd that subjects play very close to predictions of the equilibrium where most of the surplus goes to sellers of high quality goods. Moreover, decision times reáect the adjustments in buyer attention that are predicted by the model.