Working Paper: CEPR ID: DP7456
Authors: Kfir Eliaz; Ran Spiegler
Abstract: We study a market model in which competing firms use costly marketing devices to influence the set of alternatives which consumers perceive as relevant. Consumers in our model are boundedly rational in the sense that they have an imperfect perception of what is relevant to their decision problem. They apply well-defined preferences to a ?consideration set?, which is a function of the marketing devices employed by the firms. We examine the implications of this behavioral model in the context of a competitive market model, particularly on industry profits, vertical product differentiation, the use of marketing devices and consumers? conversion rates.
Keywords: Advertising; Bounded Rationality; Consideration Sets; Irrelevant Alternatives; Limited Attention; Marketing; Persuasion
JEL Codes: C72; D03; D11; D21; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bounded rationality of consumers (D11) | firms earn profits in excess of rational consumers (D22) |
| marketing strategies (M30) | consumers' consideration sets (D10) |
| marketing strategies (M30) | firm profits (L21) |
| consumers' consideration sets (D10) | conversion rates of consumers (D19) |
| rational consumers (D11) | firms' profits do not necessarily decrease (L21) |
| marketing strategies (M30) | consumers' perceptions of available products (L15) |