Advertising for consideration

Abstract

We analyze markets where firms competing on price advertise to increase the probability of entering consumers’ consideration sets. We find that moderately costly advertising allows firms to raise prices and possibly profits by reducing the fraction of price-conscious consumers, and by segmenting the market according to whether or not consumers consider the lower priced firm. However, when the cost of advertising is sufficiently low, advertising leads to a prisoners’ dilemma that adversely impacts profits without affecting expected prices.