We study two market scenarios in which firms face a population of consumers with limited attention. A consumer considers each product with a certain probability, called the attention parameter, which determines the aggregate choice probabilities of the alternatives offered in the market. Firms know the distribution of this parameter in the population. We first consider the scenario of a single firm facing no competition, and then a market this firm becomes the default seller for all consumers but faces competition of another firm. We are interested in the consequences of limited attention of the consumers and initial market share on the market outcomes such as the market power of firms measured by their profits, the variety and quality of products offered, and the welfare of the consumers. We discuss ways to incorporate the pricing decision and different specifications of the attention parameter, the latter demonstrating that the market implications depend on the determinants of attention.
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FAS Microeconomics Theory Seminar Series