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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.

Suggested Citation

  • Oksana Loginova, 2005. "Competing for Customers' Attention: Advertising When Consumers Have Imperfect Memory," Working Papers 0510, Department of Economics, University of Missouri, revised 15 Dec 2006.
  • Handle: RePEc:umc:wpaper:0510
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    File URL: https://economics.missouri.edu/working-papers/2005/wp0510_loginova.pdf
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    References listed on IDEAS

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    1. Bester, Helmut & Petrakis, Emmanuel, 1995. "Price competition and advertising in oligopoly," European Economic Review, Elsevier, vol. 39(6), pages 1075-1088, June.
    2. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-223, March.
    3. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 63-81.
    4. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
    5. Burke, Raymond R & Srull, Thomas K, 1988. " Competitive Interference and Consumer Memory for Advertising," Journal of Consumer Research, Oxford University Press, vol. 15(1), pages 55-68, June.
    6. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
    7. Kumar, Anand & Krishnan, Shanker, 2004. " Memory Interference in Advertising: A Replication and Extension," Journal of Consumer Research, Oxford University Press, vol. 30(4), pages 602-611, March.
    8. Jewell, Robert D & Unnava, H Rao, 2003. " When Competitive Interference Can Be Beneficial," Journal of Consumer Research, Oxford University Press, vol. 30(2), pages 283-291, September.
    9. LeBlanc, Greg, 1998. "Informative Advertising Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 46(1), pages 63-77, March.
    10. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
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    More about this item

    Keywords

    Advertising; Memory; Forgetting; Competitive Interference.;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • 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
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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