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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 Harvard University OpenScholar in its series Working Paper with number 76811.

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Date of creation: Dec 1969
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Handle: RePEc:qsh:wpaper:76811

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  1. 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.
  2. 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.
  3. Eliaz, Kfir & Spiegler, Ran, 2009. "Consideration Sets and Competitive Marketing," CEPR Discussion Papers 7456, C.E.P.R. Discussion Papers.
  4. Michele Piccione & Ran Spiegler, 2012. "Price Competition Under Limited Comparability," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 97-135.
  5. Eliaz, Kfir & Spiegler, Ran, 2010. "On the Strategic Use of Attention Grabbers," CEPR Discussion Papers 7863, C.E.P.R. Discussion Papers.
  6. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Consumer Choice," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 121(5), pages 803 - 843.
  7. Persson, Petra, 2013. "Attention Manipulation and Information Overload," Working Paper Series, Research Institute of Industrial Economics 995, Research Institute of Industrial Economics.
  8. 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, vol. 21(2), pages 785-818, April.
  9. 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.
  10. Bordalo, Pedro & Gennaioli, Nicola & Shleifer, Andrei, 2013. "Salience and Asset Prices," Scholarly Articles 11688793, Harvard University Department of Economics.
  11. Andreas M. Hefti, 2011. "Attention competition," ECON - Working Papers, Department of Economics - University of Zurich 028, Department of Economics - University of Zurich.
  12. Alisdair McKay & Filip Matejka, 2011. "Simple Market Equilibria with Rationally Inattentive Consumers," Boston University - Department of Economics - Working Papers Series WP2011-025, Boston University - Department of Economics.
  13. 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.
  14. Spiegler, Ran, 2011. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195398717, October.
  15. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, 04.
  16. Xavier Gabaix, 2011. "A Sparsity-Based Model of Bounded Rationality," NBER Working Papers 16911, National Bureau of Economic Research, Inc.
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Cited by:
  1. Geoffroy de Clippel & Kfir Elias & Kareen Rozen, 2013. "Competing for Consumer Inattention," Cowles Foundation Discussion Papers 1901, Cowles Foundation for Research in Economics, Yale University.
  2. James M. Sallee, 2013. "Rational Inattention and Energy Efficiency," NBER Working Papers 19545, National Bureau of Economic Research, Inc.

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