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: C72 D01 D43 D62 L11 L13 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:178:y:2018:i:c:p:318-359

DOI: 10.1016/j.jet.2018.09.012

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