"Stochastic Choice With Limited Memory" investigates the choices of a decision-maker with limited memory. In particular, how does forgetting available alternatives shape the consideration set of the decision-maker and her ultimate choices? The paper shows that (1) random memory errors generate stochastic choice, (2) it is nontheless possible to infer both the decisionmaker's preferences and the memory frictions from observed random choice rule, (3) applied to monopoly pricing, the model implies that when consumers have memory limitations, so they do not always recall all the available goods, and the probability of forgetting is high, the monopolist is better off charging a lower price than in the perfect memory case. A lower price is better in this case because when consumers are forgetful, they sometimes opt for the outside option, even when they would actually prefer the good supplied by the monopolist. By charging a lower price, the monopolist can increase the volume of (forgetful) customers, at the expense of lower profits per customer. 

Link: https://eyegane.github.io/

Tue, 09/06/2022