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Limited attention, competition and welfare

Andreas Hefti

Journal of Economic Theory, 2018, vol. 178, issue C, 318-359

Abstract: This article presents a tractable framework that embeds the allocation of limited attention into competition theory. Motivated by evidence from psychology and marketing a setting is studied where firms can manipulate consumer attention and compete in prices among perceived alternatives. The introduction of limited attention changes the positive and normative predictions obtained from otherwise standard models, such as Salop-style competition. Further, the model identifies when limited attention is beneficial or harmful to firms, and explains why the individually rational decision to become less attentive in presence of more choice options may be catalyzed to a collective inattention trap over the market mechanism.

Keywords: Attention; Imperfect competition; Bounded rationality; Product differentiation; Salience; Contest theory (search for similar items in EconPapers)
JEL-codes: D43 L13 D01 L11 D62 C72 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jetheo:v:178:y:2018:i:c:p:318-359