Endogenous attention to costs

Abstract

Studies show that consumers are often unaware of the price of their purchases. We examine whether such ignorance may be willful. We develop a model entailing consumers who may feel conflicted about spending—some people have an inherent preference for overspending (“spendthrifts”). We show that if overspending causes regret, spendthrifts are better off in the short-term from ignoring costs to their consumption (i.e., prices), when ignorance reduces anticipated regret. In the long-term, ignorance of costs may, however, be harmful, since it acts to exacerbate spendthrifts’ overconsumption. Further, our model shows that consumers who are unconflicted about their spending, or have an inherent preference to underspend (“tightwads”), do not benefit from ignoring costs to their consumption in the short-term. We test the implications of our model against two datasets—a field dataset from a supermarket and data from a websurvey entailing a hypothetical experiment. We find support for our model implications that spendthrifts pay less attention to prices, and that their inattention may be endogenous (i.e., willful or strategic). Our results may help explain previous puzzling findings of low consumer price knowledge. Further, our finding that all consumer groups addressed herein have long-term benefits from price saliency provides support for policies that ensure prices are transparent and salient to consumers.