Working Paper Series, Department of Economics, University of Zurich 28
I present a game-theoretic model where economic competition and attention competition are interdependent. On the one hand the effort to attract consumer attention depends on the value of attention to the firm which depends on the grade of price competition among all perceived firms. On the other hand attracting attention involves costs which must be covered by the earnings from competition. It is the task of this paper to clarify the consequences of such an interdependence between attention competition and economic competition for prices, attention effort and market structure as determined by the strategic equilibrium. Under limited attention the market as perceived by consumers and not the effective market is relevant to the firms which implies that prices also reflect the scarcity of attention. Less attentive consumers lead to higher prices but at the same time getting attention is more valuable which intensifies the competition for attention and leads to higher attention costs. I show that if attention competition is relatively inelastic or the commodities are strong substitutes then the gains from consumer inattention outweigh the costs of attracting attention which leads to higher profits and larger effective markets.