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Attention competition

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  • Andreas M. Hefti

Abstract

I present a game-theoretic model where economic competition and attention competition are interdependent. On the one hand the effort to attract consumer attention depends on the value of attention to the firm which depends on the grade of price competition among all perceived firms. On the other hand attracting attention involves costs which must be covered by the earnings from competition. It is the task of this paper to clarify the consequences of such an interdependence between attention competition and economic competition for prices, attention effort and market structure as determined by the strategic equilibrium. Under limited attention the market as perceived by consumers and not the effective market is relevant to the firms which implies that prices also reflect the scarcity of attention. Less attentive consumers lead to higher prices but at the same time getting attention is more valuable which intensifies the competition for attention and leads to higher attention costs. I show that if attention competition is relatively inelastic or the commodities are strong substitutes then the gains from consumer inattention outweigh the costs of attracting attention which leads to higher profits and larger effective markets.

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Bibliographic Info

Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 028.

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Date of creation: Sep 2011
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Handle: RePEc:zur:econwp:028

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Keywords: Limited attention; competition; pricing; strategic equilibrium;

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References

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  1. Hauser, John R & Wernerfelt, Birger, 1990. " An Evaluation Cost Model of Consideration Sets," Journal of Consumer Research, University of Chicago Press, vol. 16(4), pages 393-408, March.
  2. Anindya Ghose & Sha Yang, 2009. "An Empirical Analysis of Search Engine Advertising: Sponsored Search in Electronic Markets," Management Science, INFORMS, vol. 55(10), pages 1605-1622, October.
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  6. Andreas Hefti, 2011. "On uniqueness and stability of symmetric equilibria in differentiable symmetric games," ECON - Working Papers 018, Department of Economics - University of Zurich.
  7. Falkinger, Josef, 2005. "Limited Attention as the Scarce Resource in an Information-Rich Economy," IZA Discussion Papers 1538, Institute for the Study of Labor (IZA).
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  9. Gifford, Sharon, 1997. "Limited attention and the role of the venture capitalist," Journal of Business Venturing, Elsevier, vol. 12(6), pages 459-482, November.
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  13. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  14. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, vol. 96(4), pages 1043-1068, September.
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  17. Glenn Ellison & Sara Fisher Ellison, 2005. "Lessons About Markets from the Internet," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 139-158, Spring.
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  19. Peng, Lin, 2005. "Learning with Information Capacity Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 307-329, June.
  20. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
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Cited by:
  1. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 1969. "Competition for Attention," Working Paper 76811, Harvard University OpenScholar.

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