Abstract

I present a game-theoretic model where economic competition and attention competition are interdependent. On the one hand the e*ort to attract consumer attention depends on the value of attention to the *rm which depends on the grade of price competition among all perceived *rms. 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 e*ort and market structure as determined by the strategic equilibrium. Under limited attention the market as perceived by consumers and not the e*ective market is relevant to the *rms which implies that prices also re ect the scarcity of attention. Less attentive consumers lead to higher prices but at the same time getting attention is more valuable which intensi*es 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 pro*ts and larger e*ective markets.