Ultimatum Bargaining with Rational Inattention
Posted: 9 Apr 2020 Last revised: 30 Apr 2021
Date Written: May 30, 2020
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: Suggested Citation