Publication type: Conference paper
Type of review: Peer review (abstract)
Title: Revising the Salop-equilibrium in the case of attention restricted consumers
Authors: Hefti, Andreas
Page(s): 1
Pages to: 51
Conference details: 24th Annual Congress of the European Economic Association and the 64th European Meeting of the Econometric Society (EEA-ESEM 09), Barcelona, Spain 23-27 August 2009
Issue Date: 2009
Language: English
Subject (DDC): 330: Economics
Abstract: I investigate the effects of exogenously restricted consumer attention on equilibrium price, diversity and advertising in a Salop-type model. Limited attention is modelled as an upper bound on how many different products can be considered by a consumer. The positive analysis reveals that limited attention increases prices by isolating a firm’s demand function from competition. As higher prices increase the marginal revenue of advertising also equilibrium advertising is increased. In the no-entry equilibrium this leads to increased profits and redistribution from consumer rent to firms. In the free-entry equilibrium limited attention thus increases equilibrium diversity over zero-profit conditions. Conditions are provided that lead to an attention economy - namely low advertising and setup costs but also high consumer sensitivity which are compatible with a modern economy. The market outcome is generally inefficient as under fairly general conditions too much diversity and too few ads are supplied and limited attention tends to intensify this problem. As a logical extension I also consider the effect of the possibility of spamming the consumers on the equilibrium variables.
Fulltext version: Published version
License (according to publishing contract): Licence according to publishing contract
Departement: School of Management and Law
Organisational Unit: Center for Energy and Environment (CEE)
Appears in collections:Publikationen School of Management and Law

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