Advertising for Consideration
Posted: 9 May 2017 Last revised: 27 Nov 2018
Date Written: June 1, 2017
We analyze markets where firms competing on price advertise to increase the probability of entering consumers’ consideration sets. We find that moderately costly advertising allows firms to raise prices and possibly profits by reducing the fraction of price-conscious consumers, and by segmenting the market according to whether or not consumers consider the lower priced firm. However, when the cost of advertising is sufficiently low, advertising leads to a prisoners’ dilemma that adversely impacts profits without affecting expected prices.
Keywords: Advertising, Bounded Rationality, Consideration Sets, Limited Attention, Oligopoly, Price Dispersion
JEL Classification: D03, D21, D43, L13, M37
Suggested Citation: Suggested Citation