Rigid pricing and rationally inattentive consumer

This paper proposes a mechanism leading to rigid pricing as an optimal strategy. It applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity. The consumer needs to process information about the realized price, while the seller is perfectly attentive. The seller chooses to price rigidly, i.e. prices respond to changes in the unit input cost less than if the consumer was perfectly attentive. The rigidity is sometimes manifested by discreteness of prices – the seller charges a finite set of different prices even for a continuous range of unit input costs. The seller does so to provide the consumer with easily observable prices, which stimulates her to consume more and increases the seller's profit.