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Competition for Attention

Author

Listed:
  • Pedro Bordalo
  • Nicola Gennaioli
  • Andrei Shleifer

Abstract

We present a model of market competition in which consumers' attention is drawn to the products' most salient attributes. Firms compete for consumer attention via their choices of quality and price. Strategic positioning of a 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 costs of quality change, innovation can lead to radical shifts in markets, as in the case of decommoditization of the coffee market by Starbucks. In the context of financial innovation, the model generates the phenomenon of "reaching for yield".

Suggested Citation

  • Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2016. "Competition for Attention," Review of Economic Studies, Oxford University Press, vol. 83(2), pages 481-513.
  • Handle: RePEc:oup:restud:v:83:y:2016:i:2:p:481-513.
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    File URL: http://hdl.handle.net/10.1093/restud/rdv048
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    References listed on IDEAS

    as
    1. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Asset Prices," American Economic Review, American Economic Association, vol. 103(3), pages 623-628, May.
    2. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters,in: Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74 Edward Elgar Publishing.
    3. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Consumer Choice," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 803-843.
    4. Stefano Dellavigna & Joshua M. Pollet, 2009. "Investor Inattention and Friday Earnings Announcements," Journal of Finance, American Finance Association, vol. 64(2), pages 709-749, April.
    5. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
    6. Michele Piccione & Ran Spiegler, 2012. "Price Competition Under Limited Comparability," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 97-135.
    7. Persson, Petra, 2013. "Attention Manipulation and Information Overload," Working Paper Series 995, Research Institute of Industrial Economics.
    8. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
    9. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1661-1710.
    10. Filip Matejka & Alisdair McKay, 2012. "Simple Market Equilibria with Rationally Inattentive Consumers," American Economic Review, American Economic Association, vol. 102(3), pages 24-29, May.
    11. Dahremöller, Carsten & Fels, Markus, 2015. "Product lines, product design, and limited attention," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 437-456.
    12. Anderson, Simon P & de Palma, Andre, 1992. "Multiproduct Firms: A Nested Logit Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 40(3), pages 261-276, September.
    13. Andreas M. Hefti, 2011. "Attention competition," ECON - Working Papers 028, Department of Economics - University of Zurich.
    14. Kfir Eliaz & Ran Spiegler, 2011. "Consideration Sets and Competitive Marketing," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 235-262.
    15. 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.
    16. Azar, Ofer H., 2008. "The effect of relative thinking on firm strategy and market outcomes: A location differentiation model with endogenous transportation costs," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 684-697, November.
    17. Eliaz, Kfir & Spiegler, Ran, 2011. "On the strategic use of attention grabbers," Theoretical Economics, Econometric Society, vol. 6(1), January.
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    Citations

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    Cited by:

    1. Gabaix, Xavier & Laibson, David & Li, Deyuan & Li, Hongyi & Resnick, Sidney & de Vries, Casper G., 2016. "The impact of competition on prices with numerous firms," Journal of Economic Theory, Elsevier, vol. 165(C), pages 1-24.
    2. Allred, Sarah & Duffy, Sean & Smith, John, 2016. "Cognitive load and strategic sophistication," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 162-178.
    3. Geoffroy de Clippel & Kfir Eliaz & Kareen Rozen, 2014. "Competing for Consumer Inattention," Journal of Political Economy, University of Chicago Press, vol. 122(6), pages 1203-1234.
    4. James M. Sallee, 2014. "Rational Inattention and Energy Efficiency," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 781-820.
    5. Paola Manzini & Marco Mariotti, 2018. "Competing for Attention: Is the Showiest Also the Best?," Economic Journal, Royal Economic Society, vol. 128(609), pages 827-844, March.
    6. Ennio Bilancini & Leonardo Boncinelli, 2014. "Persuasion with Reference Cues and Elaboration Costs," Center for Economic Research (RECent) 102, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
    7. Herweg, Fabian & Müller, Daniel & Weinschenk, Philipp, 2017. "Salience, competition, and decoy goods," Economics Letters, Elsevier, vol. 153(C), pages 28-31.
    8. Alessandro Belmonte & Michael Rochlitz, 2018. "The Political Economy of Collective Memories: Evidence from Russian Politics," HSE Working papers WP BRP 59/PS/2018, National Research University Higher School of Economics.
    9. Dahremöller, Carsten & Fels, Markus, 2015. "Product lines, product design, and limited attention," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 437-456.
    10. repec:spr:scient:v:115:y:2018:i:3:d:10.1007_s11192-018-2723-9 is not listed on IDEAS
    11. Alberto Cavallo & Brent Neiman & Roberto Rigobon, 2014. "Currency Unions, Product Introductions, and the Real Exchange Rate," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 529-595.
    12. Gerasimou, Georgios & Papi, Mauro, 2015. "Oligopolistic Competition with Choice-Overloaded Consumers," MPRA Paper 68509, University Library of Munich, Germany.
    13. Markus Dertwinkel-Kalt & Mats Köster, 2018. "Salience and Skewness Preferences," CESifo Working Paper Series 7416, CESifo Group Munich.
    14. repec:eee:eecrev:v:101:y:2018:i:c:p:330-353 is not listed on IDEAS
    15. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    16. Repetto, Luca & Solis, Alex, 2017. "The Price of Inattention: Evidence from the Swedish Housing Market," Working Paper Series 2017:10, Uppsala University, Department of Economics.
    17. Eliaz, Kfir & Oren-Kolbinger, Orli & Weisburd, Sarit, 2017. "Limited Attention, Salience and Changing Prices: Evidence from a Field Experiment in Online Supermarket Shopping," CEPR Discussion Papers 12014, C.E.P.R. Discussion Papers.
    18. Azar, Ofer H., 2014. "Optimal strategy of multi-product retailers with relative thinking and reference prices," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 130-140.
    19. Inderst, Roman & Obradovits, Martin, 2015. "Too Much Attention on Low Prices? Loss Leading in a Model of Sales with Salient Thinkers," CEPR Discussion Papers 10813, C.E.P.R. Discussion Papers.
    20. Inderst, Roman & Obradovits, Martin, 2016. "Excessive Competition for Headline Prices," CEPR Discussion Papers 11284, C.E.P.R. Discussion Papers.
    21. Andersson, Ola & Ingebretsen Carlson, Jim & Wengström, Erik, 2016. "Differences Attract: An Experimental Study of Focusing in Economic Choice," Working Papers 2016:15, Lund University, Department of Economics.

    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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