No abstract

We analyze how firms design their product lines when facing customers with limited attention. We assume that consumers simplify complex decision problems by neglecting several of the relevant aspects. Whether and to what extent a customer pays attention to an attribute of a product depends on the importance of the attribute as well as its dispersion in the set of alternatives. A firm may thus influence its customers' attention through the range of products it makes available. We show that a firm can increase its profit by introducing additional goods that have the sole function of manipulating consumer attention. Hence, even with a homogenous consumer population our model can explain product differentiation. We derive several results on how a firm can effectively manipulate its customers' attention.

We analyze how firms design their product lines when facing customers with limited attention. We assume that consumers simplify complex decision problems by neglecting several of the relevant aspects. Whether and to what extent a customer pays attention to an attribute of a product depends on the importance of the attribute as well as its dispersion in the set of alternatives. A firm may thus influence its customers' attention through the range of products it makes available. We show that a firm can increase its profit by introducing additional goods that have the sole function of manipulating consumer attention. Hence, even with a homogenous consumer population our model can explain product differentiation. We derive several results on how a firm can effectively manipulate its customers' attention.

No abstract

In a market with hidden product details and systematic consumer biases, firms have the possibility to unshroud and thereby to rectify such market obliquities. While the classical view was that firms will have an incentive to unshroud, Gabaix and Laibson (2006) show that there exist constellations in which firms prefer to leave the market shrouded. Building on that model I introduce a more strategic and long‐term dimension of unshrouding which turns out to fundamentally alter the underlying incentives to unshroud. In particular, I show that there exists an incentive to unshroud that stems from differences in add‐on profitability and that it is dependent on parameter constellations whether a more profitable or a less profitable firm will want to unshroud.