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Advertising and Pricing When Attention is Limited

30 Pages Posted: 9 May 2017 Last revised: 3 Jun 2017

Carmen Astorne-Figari

University of Memphis

Joaquín López

University of Memphis - Economics

Aleksandr Yankelevich

Michigan State University - Quello Center

Date Written: June 1, 2017

Abstract

We analyze markets where firms that compete on price advertise to vie for consumers' limited attention. Our baseline model of attention has a number of desirable properties. It offers an explanation for price dispersion in homogeneous goods markets in the absence of search costs. Moreover, it leads to a unique symmetric price distribution that changes from competitive to monopoly pricing as attention becomes more limited. When firms can influence consumer attention by advertising and the cost of advertising is low, advertising leads firms to a prisoner’s dilemma that adversely impacts profits without changing prices. However, moderately costly advertising permits firms to raise prices and possibly profits by segmenting the market.

Keywords: Advertising, Bounded Rationality, Consideration Sets, Limited Attention, Oligopoly, Price Dispersion

JEL Classification: D03, D21, D43, L13, M37

Suggested Citation

Astorne-Figari, Carmen and López, Joaquín and Yankelevich, Aleksandr, Advertising and Pricing When Attention is Limited (June 1, 2017). Quello Center Working Paper. Available at SSRN: https://ssrn.com/abstract=2964298

Carmen Astorne-Figari

University of Memphis ( email )

Memphis, TN 38152-3370
United States

HOME PAGE: http://www.carmenastorne.com

José Joaquín López

University of Memphis - Economics ( email )

Memphis, TN 38152
United States

HOME PAGE: http://joaquinlopezecon.com/

Aleksandr Yankelevich (Contact Author)

Michigan State University - Quello Center ( email )

406 Communication Arts Building
404 Wilson Road
East Lansing, MI 48824-1212
United States

HOME PAGE: http://aleksyankelevich.com/

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