Competition for Attention

Pedro da Costa Santos Bordalo, Nicola Gennaioli, Andrei Shleifer

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We present a model of market competition in which consumers' attention is drawn to the products' most salient attributes. Firms compete for consumer attention via their choices of quality and price. Strategic positioning of a 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 costs of quality change, innovation can lead to radical shifts in markets, as in the case of decommoditization of the coffee market by Starbucks. In the context of financial innovation, the model generates the phenomenon of "reaching for yield".
Original languageEnglish
Pages (from-to)481-513
Number of pages33
JournalReview of Economic Studies
Issue number2
Early online date30 Nov 2015
Publication statusPublished - 1 Apr 2016

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