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Information Processing and Quality Choice: The Case of Organic Milk

Analyzing differences in the quality of information-intensive goods may require information processing from consumers. Focusing on the differences between organic and conventional milk, we propose analyzing such markets using a tractable micro-founded discrete choice framework with Rational Inattention, non-homothetic preferences, and heterogeneous consumers. We predict theoretically and confirm empirically that consumers with higher efficiency of information processing (EIP) choose higher quality goods than those with lower EIP; however, this does not hold for poorer consumers for whom budget constraints are binding. Similarly, choosing higher quality increases with income, but the effect is weak without sufficiently high EIP.