Selling New Product to Rationally (In)attentive Consumer

We study a monopolistic firm’s various sales strategies to sell a new product to a rationally (in)attentive consumer who can conduct costly learning to resolve valuation uncertainty. Our analysis suggests that the optimal pricing scheme is a two-regime policy, in which the seller quotes a high price to induce attention allocation when information is cheap; whereas he marks down to inhibit learning when information is expensive. This structure is preserved if the seller allows for product return as well. Furthermore, we examine the postponed pricing strategy and in this case, the sole purpose of attention allocation for the consumer is to induce a desirable price and there is no heterogeneity in purchase decisions even if learning always occurs. Surprisingly, contrary to conventional wisdom, we show the first-mover advantage doesn’t hold in general. We also discuss the welfare implications on the consumer, and, somewhat counter-intuitively, find that easy access to product information or a lenient product return policy can be detrimental to the consumer