Competing to Commit : Markets with Rational Inattention

Two homogeneous-good firms compete for a consumer’s unitary demand. The consumer is rationally inattentive and pays entropy-based information processing costs to learn about the firms’ offers. While trade is always inefficient if firms collude, we obtain efficiency under competition for a range of information costs. Competition puts downward pressure on prices. Additionally, competition increases the demand pointwise, since the consumer’s information processing decision depends on the level of competition. For high enough information costs, this effect dominates: Firms’ total surplus is larger under competition than under collusion. Our model reveals that markets with common ownership may remain competitive