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Competition for Attention

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  • Pedro Bordalo
  • Nicola Gennaioli
  • Andrei Shleifer

Abstract

We present a model of market competition and product differentiation in which consumers' attention is drawn to the products' most salient attributes. Firms compete for consumer attention via their choices of quality and price. With salience, strategic positioning of each product affects how all other products are perceived. With this attention externality, depending on the cost of producing quality some markets exhibit “commoditized” price salient equilibria, while others exhibit “de-commoditized” quality salient equilibria. When the cost of producing quality changes, innovation can lead to a radical change in markets. In the context of financial innovation, the model generates the well documented phenomenon of “reaching for yield”.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19076.

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Date of creation: May 2013
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Handle: RePEc:nbr:nberwo:19076

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References

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  1. Spiegler, Ran & Eliaz, Kfir, 2011. "On the strategic use of attention grabbers," Theoretical Economics, Econometric Society, Econometric Society, vol. 6(1), January.
  2. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  3. Simon P. Anderston & Andre de Palma, 1991. "Multiproduct Firms: A Nested Logit Approach," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 973, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Eliaz, Kfir & Spiegler, Ran, 2006. "Consideration Sets and Competitive Marketing," MPRA Paper 21434, University Library of Munich, Germany, revised 03 Sep 2009.
  5. Azar, Ofer H., 2007. "The effect of relative thinking on firm strategy and market outcomes: A location differentiation model with endogenous transportation costs," MPRA Paper 4455, University Library of Munich, Germany.
  6. Michele Piccione & Ran Spiegler, 2010. "Price Competition under Limited Comparability," Levine's Working Paper Archive 661465000000001143, David K. Levine.
  7. Filip Matejka & Alisdair McKay, 2012. "Simple Market Equilibria with Rationally Inattentive Consumers," American Economic Review, American Economic Association, American Economic Association, vol. 102(3), pages 24-29, May.
  8. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, American Finance Association, vol. 64(2), pages 709-749, 04.
  9. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  10. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
  11. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
  12. Andreas M. Hefti, 2011. "Attention competition," ECON - Working Papers, Department of Economics - University of Zurich 028, Department of Economics - University of Zurich.
  13. Persson, Petra, 2013. "Attention Manipulation and Information Overload," Working Paper Series, Research Institute of Industrial Economics 995, Research Institute of Industrial Economics.
  14. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199334261, October.
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Cited by:
  1. James M. Sallee, 2013. "Rational Inattention and Energy Efficiency," NBER Working Papers 19545, National Bureau of Economic Research, Inc.
  2. de Clippel, Geoffroy & Eliaz, Kfir & Rozen, Kareen, 2013. "Competing for Consumer Inattention," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9553, C.E.P.R. Discussion Papers.

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