Consumer Unawareness and Competitive Strategies

Abstract

Many purchase decisions rely on complex information. In reality, some consumers may not be well informed and unaware of their lack of information, a situation termed consumer unawareness. In a stylized model of market entry, this paper investigates how consumer unawareness of preference-product match affects firms’ strategies in product, pricing, and promotion. It shows that for entry to occur, the level of unawareness must be intermediate. When entry occurs, firms offer differentiated products to avoid head-on competition and use mixed pricing strategies. As the level of unawareness decreases, both the incumbent and entrant become less competitive in pricing. This paper also analyzes how firms strategically promote consumer awareness through advertising. While the promotion of the entrant helps increase its demand after entry, the promotion of the incumbent can serve as either a barrier or an invitation to entry. Fearing the former, the entrant may not enter, or enter with limited promotion; benefiting from the latter, the entrant may enter and free ride on the incumbent’s promotion. As a result of the former situation, a relatively high degree of consumer unawareness is maintained despite competition. This paper also identifies the incumbent's brand equity and promotion costs as critical factors that drive firms’ strategic choices. Finally, this paper presents economic and managerial implications of the findings.