New BERG Working Paper No. 184 by Stefanie Y. Schmitt published
In the BERG Working Paper Series 184 Stefanie Y. Schmitt has published a new paper entitled "Competition with limited attention to quality differences".
A complete overview of all BERG Working Papers published so far can be found here.
I analyze the implication of consumers’ limited attention to quality differences on market outcomes and welfare. I model this limited attention to quality differences with a perception threshold: Consumers only perceive quality differences between goods that exceed the consumers’ perception threshold. The model allows for two types of equilibria: equilibria with distinguishable and equilibria with indistinguish- able qualities. I show that horizontal product differentiation, which gives firms market power, affects equilibrium selection. If firms are horizontally differentiated, firms produce goods with indistinguishable qualities. Then, limited attention harms consumers and benefits firms. In contrast, if firms are not horizontally differentiated, firms produce goods with distinguishable qualities. Then, limited attention has no effect on consumers’ welfare or firms’ profits.