Competing for Customers' Attention: Advertising When Consumers Have Imperfect Memory

Abstract

This paper applies the theory of memory for advertising, developed in the consumer behavior literature, to an industrial organization setting to provide insight into advertising strategies in imperfectly competitive markets. There are two firms and infinitely many identical consumers. The firms produce a homogeneous product and distribute their brands through a common retailer. Consumers randomly arrive and are willing to buy one unit of the product. They are unaware of the existence of a particular brand unless they remember an ad describing it. Under "retroactive interference'' consumers remember recently seen ads and forget about ads they saw in the past. Under "proactive interference'' the ability of consumers to recall new ads is hampered by past ad exposure. The equilibrium of the advertising game is characterized for both proactive and retroactive interferences across three strategic settings. In the Simultaneous Move setting, the firms' equilibrium advertising frequencies, remarkably, do not depend on the type of interference. In the Sequential Move and Dynamic settings, proactive and retroactive interferences do give rise to different equilibrium outcomes.