Pricing of Add-On Products with Rationally Inattentive Consumers
(A2023-114334)

AUTHORS

Sergey Turlo, Goethe University Frankfurt; Dominik Naeher, University of Göttingen

ABSTRACT

We study the pricing of a multi-product seller offering main (or base) products and add-on products, e.g., cameras and lenses, when the buyer is rationally inattentive. Particularly, the buyer faces a fixed attentional capacity, i.e., an upper bound on the amount of information that the buyer can process. We characterize how the buyer allocates attention across main goods and add-on goods and show that for low levels of attentional capacity, the buyer prefers to ignore add-on products entirely. We use these results to derive seller optimal pricing. Our preliminary analysis, focusing on the case with an exogenous main good price, identifies that both the optimal add-on price as well as the seller’s profits are increasing in the buyer’s attentional capacity. Our work yields testable hypotheses linking buyer characteristics with choice behavior and prices and has managerial implications for pricing.