Competition with limited attention to quality differences

Stefanie Y. Schmitt

No 184, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

Abstract: I analyze the implication of consumers' limited attention to quality differences on market outcomes and welfare. I model this limited attention to quality differences with a perception threshold: Consumers only perceive quality differences between goods that exceed the consumers' perception threshold. The model allows for two types of equilibria: equilibria with distinguishable and equilibria with indistinguishable qualities. I show that horizontal product differentiation, which gives firms market power, affects equilibrium selection. If firms are horizontally differentiated, firms produce goods with indistinguishable qualities. Then, limited attention harms consumers and benefits firms. In contrast, if firms are not horizontally differentiated, firms produce goods with distinguishable qualities. Then, limited attention has no effect on consumers' welfare or firms' profits.

Keywords: Limited Attention; Perception Threshold; Product Differentiation; Product Quality (search for similar items in EconPapers)
JEL-codes: D43 D91 L13 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:184

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