Salience in markets

Fabian Herweg (), Daniel Müller and Philipp Weinschenk

Chapter 4 in Handbook of Behavioral Industrial Organization, 2018, pp 75-113 from Edward Elgar Publishing

Abstract: A consumer’s evaluation of a product often depends on the choice context. Specifically, the choice context influences which of a product’s attributes the consumer perceives as outstanding, i.e., salient. This chapter is devoted to a particular model of context-dependent choice, the model of salient thinking introduced by Bordalo et al. (2013) and its application to models of industrial organization. We first restate the model’s main implications for consumer behavior. Thereafter, we address how a profit-maximizing firm responds to its consumers’ choice behavior being context dependent. To this end we present a streamlined model of market competition when consumers are salient thinkers, which allows us to synthesize several important implications of context-dependent choice for market outcomes that have been discussed in the literature. Furthermore, within this model we develop novel insights regarding how firms can benefit from manipulating consumers’ choice context by offering decoy goods. Finally, we survey the extant applications of the theory of salient thinking to models of industrial organization, discuss the empirical evidence in support of the theory of salient thinking, and outline avenues for future research.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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