Competition With Limited Attention to Quality Differences

ABSTRACT I analyze the implication of consumers' limited attention to quality differences on market outcomes and welfare. I model this limited attention with a perception threshold, that is, consumers only perceive quality differences between goods that exceed their perception threshold. The model allows for equilibria with distinguishable and with indistinguishable qualities. If firms are sufficiently horizontally differentiated, firms produce goods with indistinguishable qualities. Then, limited attention harms consumers and benefits firms. If firms are not sufficiently horizontally differentiated, firms produce goods with distinguishable qualities. Then, limited attention has no effect on consumers' welfare or firms' profits.