Working Paper: CEPR ID: DP7286
Authors: Simon P. Anderson; Andr de Palma
Abstract: Limited consumer attention limits product market competition: prices are stochastically lower the more attention is paid. Ads compete to be the lowest price with other ads from the same sector and they compete for attention with ads from other sectors: equilibrium sector ad shares under free entry follow a CES form. When a sector gets more attractive, its advertising expands: others lose ad market share but may increase in absolute terms if sufficiently attractive. The "information hump" shows highest ad levels for intermediate attention levels when there is a decent enough chance of getting the message across and also of not being undercut by a cheaper offer. The Information Age takes off when the number of sectors grows, but total ad volume reaches an upper limit. Overall, advertising is excessive, though the allocation across sectors is optimal. Nonetheless, both large sectors and small ones can be blamed for misallocation of ads in using up scarce attention.
Keywords: advertising; distribution; consumer attention; economics of attention; information age; information filtering; price dispersion; size distribution of firms
JEL Codes: D11; D60; I0; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited consumer attention (D19) | lower competition in product markets (L13) |
| lower competition in product markets (L13) | higher prices (D49) |
| limited consumer attention (D19) | higher prices (D49) |
| increased competition for consumer attention (F61) | price dispersion (L11) |
| advertising levels (M37) | equilibrium price distribution (D39) |