Advertising and Pricing When Attention is Limited
Posted: 9 May 2017 Last revised: 13 Nov 2018
Date Written: June 1, 2017
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
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