Salience and Information Asymmetry

Abstract

In this paper we study optimal price setting by a seller that offers a supposedly higher-quality product in a market where a good of standard quality is already available. Consumers do not directly observe the quality of the product and their purchasing decisions are distorted by salient thinking. Consumer attention can be directed towards the product attribute - quality or price - that stands out in the market. We show that separation takes place only if the salience bias is moderate. Instead, if the salience bias is sufficiently strong, the seller prefers to set a low price to mitigate the detrimental effects of price salience, even though this strategy may not lead to separation. Our analysis suggests that the interplay between asymmetric information and salient thinking may provide an explanation for why price differences observed in markets do not always reflect quality differences.