Ultimatum Bargaining with Rational Inattention

Posted: 9 Apr 2020 Last revised: 30 Apr 2021

See all articles by Doron Ravid

Doron Ravid

University of Chicago - Department of Economics

Date Written: May 30, 2020

Abstract

A seller bargains with a rationally inattentive buyer (Sims, 2003) over a good of random quality. After observing quality, the seller makes a take-it-or-leave-it offer. The buyer pays attention to the seller's product and offer at a cost proportional to expected entropy reduction. Because attention is free off-path, multiple equilibria emerge, many of which are efficient. A trembling-hand-like refinement (Selten, 1975) rules out efficiency, delivering complete disagreement when attention is expensive and a unique equilibrium with trade when attention is cheap. In this equilibrium, the buyer overpays for low-quality goods, underpays for high-quality goods, and earns a strictly positive payoff.

Keywords: Bargaining, monopoly pricing, ultimatums, rational inattention, entropy reduction, equilibrium refinement, complexity

JEL Classification: D86, C78

Suggested Citation

Ravid, Doron, Ultimatum Bargaining with Rational Inattention (May 30, 2020). Available at SSRN: https://ssrn.com/abstract=3558221 or http://dx.doi.org/10.2139/ssrn.3558221

Doron Ravid (Contact Author)

University of Chicago - Department of Economics ( email )

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Chicago, IL 60637
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