Revising the Salop-equilibrium in the case of attention restricted consumers (Preliminary version)∗

I investigate the effects of exogenously restricted consumer attention on equilibrium price, diversity and advertising in a Salop-type model. Limited attention is modelled as an up-per bound on how many different products can be considered by a consumer. The positive analy-sis reveals that limited attention increases prices by isolating a firm’s demand function from competition. As higher prices increase the marginal revenue of advertising also equi-librium advertising is increased. In the no-entry equilibrium this leads to increased profits and redistribution from consumer rent to firms. In the free-entry equilibrium limited atten-tion thus increases equilibrium diversity over zero-profit conditions. Conditions are provided that lead to an attention economy- namely low advertising and setup costs but also high consumer sensitivity which are compatible with a modern economy. The market outcome is generally inefficient as under fairly general conditions too much diversity and too few ads are supplied and limited attention tends to intensify this problem. As a logical extension I also consider the effect of the possibility of spamming the consumers on the equilibrium variables