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Salience in markets

In: Handbook of Behavioral Industrial Organization

Author

Listed:
  • Fabian Herweg
  • Daniel Müller
  • Philipp Weinschenk

Abstract

A consumer’s evaluation of a product often depends on the choice context. Specifically, the choice context influences which of a product’s attributes the consumer perceives as outstanding, i.e., salient. This chapter is devoted to a particular model of context-dependent choice, the model of salient thinking introduced by Bordalo et al. (2013) and its application to models of industrial organization. We first restate the model’s main implications for consumer behavior. Thereafter, we address how a profit-maximizing firm responds to its consumers’ choice behavior being context dependent. To this end we present a streamlined model of market competition when consumers are salient thinkers, which allows us to synthesize several important implications of context-dependent choice for market outcomes that have been discussed in the literature. Furthermore, within this model we develop novel insights regarding how firms can benefit from manipulating consumers’ choice context by offering decoy goods. Finally, we survey the extant applications of the theory of salient thinking to models of industrial organization, discuss the empirical evidence in support of the theory of salient thinking, and outline avenues for future research.

Suggested Citation

  • Fabian Herweg & Daniel Müller & Philipp Weinschenk, 2018. "Salience in markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 4, pages 75-113, Edward Elgar Publishing.
  • Handle: RePEc:elg:eechap:16609_4
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    Cited by:

    1. Friehe, Tim & Pham, Cat Lam, 2020. "Products liability when consumers are salient thinkers," Economics Letters, Elsevier, vol. 186(C).
    2. Clark, Derek J. & Mathisen, Terje Andreas, 2020. "Salience in a simple transport market," Research in Transportation Economics, Elsevier, vol. 82(C).

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    Keywords

    Economics and Finance;

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