Price-Based Attention and Welfare

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.