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Competing for Customers' Attention: Advertising When Consumers Have Imperfect Memory

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Abstract

This paper applies the theory of memory for advertising, developed in the consumer behavior literature, to an industrial organization setting to provide insight into advertising strategies in imperfectly competitive markets. There are two firms and infinitely many identical consumers. The firms produce a homogeneous product and distribute their brands through a common retailer. Consumers randomly arrive and are willing to buy one unit of the product. They are unaware of the existence of a particular brand unless they remember an ad describing it. Under ``retroactive interference'' consumers remember recently seen ads and forget about ads they saw in the past. Under ``proactive interference'' the ability of consumers to recall new ads is hampered by past ad exposure. The equilibrium of the advertising game is characterized for both proactive and retroactive interferences across three strategic settings. In the Simultaneous Move setting, the firms' equilibrium advertising frequencies, remarkably, do not depend on the type of interference. In the Sequential Move and Dynamic settings, proactive and retroactive interferences do give rise to different equilibrium outcomes.

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File URL: http://economics.missouri.edu/working-papers/2005/wp0510_loginova.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0510.

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Length: 28 pgs.
Date of creation: 15 Mar 2005
Date of revision: 15 Dec 2006
Handle: RePEc:umc:wpaper:0510

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Keywords: Advertising; Memory; Forgetting; Competitive Interference.;

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  1. Sendhil Mullainathan, 2002. "A Memory-Based Model Of Bounded Rationality," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 735-774, August.
  2. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March.
  3. Keller, Kevin Lane, 1987. " Memory Factors in Advertising: The Effect of Advertising Retrieval Cues on Brand Evaluations," Journal of Consumer Research, University of Chicago Press, vol. 14(3), pages 316-33, December.
  4. Bester, Helmut & Petrakis, Emmanuel, 1995. "Price competition and advertising in oligopoly," European Economic Review, Elsevier, vol. 39(6), pages 1075-1088, June.
  5. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  6. Burke, Raymond R & Srull, Thomas K, 1988. " Competitive Interference and Consumer Memory for Advertising," Journal of Consumer Research, University of Chicago Press, vol. 15(1), pages 55-68, June.
  7. Jewell, Robert D & Unnava, H Rao, 2003. " When Competitive Interference Can Be Beneficial," Journal of Consumer Research, University of Chicago Press, vol. 30(2), pages 283-91, September.
  8. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
  9. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  10. LeBlanc, Greg, 1998. "Informative Advertising Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 46(1), pages 63-77, March.
  11. Kumar, Anand & Krishnan, Shanker, 2004. " Memory Interference in Advertising: A Replication and Extension," Journal of Consumer Research, University of Chicago Press, vol. 30(4), pages 602-11, March.
  12. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  13. Keller, Kevin Lane, 1991. " Memory and Evaluation Effects in Competitive Advertising Environments," Journal of Consumer Research, University of Chicago Press, vol. 17(4), pages 463-76, March.
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