Working Paper: NBER ID: w19076
Authors: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
Abstract: We present a model of market competition and product differentiation in which consumers' attention is drawn to the products' most salient attributes. Firms compete for consumer attention via their choices of quality and price. With salience, strategic positioning of each product affects how all other products are perceived. With this attention externality, depending on the cost of producing quality some markets exhibit "commoditized" price salient equilibria, while others exhibit "de-commoditized" quality salient equilibria. When the cost of producing quality changes, innovation can lead to a radical change in markets. In the context of financial innovation, the model generates the well documented phenomenon of "reaching for yield".
Keywords: salience; market competition; product differentiation; financial innovation; consumer attention
JEL Codes: D03; D43; L13; M31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| salience of a product's quality (L15) | consumer attention (D18) |
| consumer attention (D18) | misvaluation of products (D46) |
| price-salient markets (D40) | neglect of quality by consumers (L15) |
| firm's strategic pricing (L11) | consumer perceptions of quality and price of rival products (L15) |
| decrease in cost of quality (L15) | enhancement of quality perception among consumers (L15) |
| enhancement of quality perception among consumers (L15) | raising prices without losing demand (D49) |
| innovations in quality production (L15) | shift from price-salient to quality-salient market equilibria (L15) |
| salience of higher returns (G11) | reaching for yield by consumers (D12) |