Seminar: Marco Haan, University of Groningen.

Title: Advertising for Attention.

Abstract:

We study the role of advertising in increasing consumer awareness about the existence of firms. When consumers search for products, they first visit the firms whose advertising is more salient. The likelihood that a consumer visits a firm is proportional to that firm's share in total advertising expenditures. We show that equilibrium advertising levels are increasing in consumer search costs. Yet, equilibrium profits are non-monotonic in search costs: firms are not necessarily better off if search costs increase. In our model, advertising is purely wasteful. Equilibrium prices are unaffected, and firms would be better off without the possibility to advertise.