Competition for attention in the Information (overload) Age

Abstract

The Information Age has a surfeit of information received relative to what is processed. We model multiple sectors competing for consumer attention, with competition in price within each sector. Sector advertising levels follow a constant elasticity of substitution (CES) form, and within-sector prices are dispersed with a truncated Pareto distribution. The “information hump” shows highest ad levels for intermediate attention levels. Overall, advertising is excessive, although the allocation across sectors is optimal. The blame for information overload falls most on product categories with low information transmission costs and low profits.

1. Introduction

▪ According to a Wiki cite, perhaps the first academic to articulate the concept of attention economics was Herbert Simon (1970), when he wrote

… in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.

This is echoed in Lanham (2006), in the idea that we are drowning in information but short of the attention to make sense of that information (see Eppler and Mengis, 2004, for a multidisciplinary review of information overload). Our working definition of the Information Age is a surfeit of information relative to the ability (or desire) to process it. We turn around Simon's point to study how restricted attention affects the market information provided. In particular, we look at competition between firms providing information in the form of ads for their products. Facing limited attention, a firm might try and get away with a high price in the hope that its competitors' ads about their lower prices have been crowded out from the information receiver's attention span. This leads us to consider price dispersion in the face of endogenous congestion where information from each sector (industry) competes within the sector and with each other sector (even though sectors do not directly compete except for attention). We track several overall dimensions of the economics of information overload, advertising volume and clutter, and price dispersion.

The Information Age is documented by Shenk (1997), who states that the average American encountered 560 daily advertising messages in 1971 and over 3000 per day by 1997 (estimates now range from 245 to 5000 exposures a day: see, e.g., http://www.amic.com/guru/results).¹ At the same time, though, consumer retention rates for ads remain low² (the reader can ask himself or herself how many ads s/he remembers from yesterday!).³ Perhaps not surprisingly, the costs of reaching prospective consumers are low, and vary from $6 CPM (cost per thousand impressions) for Internet to $18 for network TV and $26 for newspapers (for 2006, http://www.wikinvest.com/concept/Impact_of_Internet_Advertising),⁴ and, of course, spam email is very low cost. This picture of many messages relative to retention underscores our modelling approach.

The Information Age comes from several sources, primarily because the means of reaching people has expanded enormously with lower costs of sending information as more (and cheaper) channels now reach potential consumers. Billboards and newspaper ads have been supplemented by Internet pop-ups, telemarketing, and product placements within TV programs (and on football players' jerseys). If costs of informing fall uniformly, we show there are no real effects, just a proportional increase in the volume of messages. This neutrality result is ascribed to rent dissipation by entering firms. Information costs have not been lowered uniformly across the board, though, and some sectors' messages are more appropriately delivered by the new media. However, cheaper access to attention also means that rivals can access attention more cheaply too, intensifying in-sector competition. This effect renders competition more acute, lowering prices and benefiting consumers. Scarcity of attention brings spillovers into other sectors, raising their prices and making it more likely interesting offers are missed.

New product sectors facilitated by communication-enabled access cause pricing churn for other advertised goods. A new product class depresses existing classes' ads relatively (as a fraction of the total volume of messages), and it drives down weaker ones absolutely. It may even cause stronger sectors to increase in size because price competition is relaxed (prices are stochastically higher). Thus, there are information complementarities across product sectors.

Because both work and leisure time are spent increasingly on information-carrying activities,⁵ it is plausible that consumer attention spans (the number of ads that can be absorbed) have risen.⁶ This may induce more or less information transmission. When consumer attention is sparse, little information will be sent because there is not much chance of getting a look-in. Prices will be near monopoly levels because there is little chance of running across a rival. With a lot of attention, not much information is sent because there is a good chance the consumer will get a better offer from the same sector. Prices will be low, so the benefit from sending a message is low. The middle ground—the “information hump”—is the fertile ground for messages, yielding a fair shot at making a sale at a reasonably high price, both by being seen but by no rival from the same sector being found.

We also track the distribution of messages across sectors. With low levels of attention, highly profitable sectors will be most prominently represented. Increasing consumer attention brings firms into more competition with each other, which drives down sector profitability and serves to equalize opportunities across sectors and generally lower mark-ups. Improved communication costs in specific sectors lower prices there, although the extra crowding can relax competition (and raise prices) in other sectors.

We adapt Butters's (1977) seminal work on informative advertising to model firms' actions. Butters derives a density of advertised prices and sales prices for a single sector; he proposes a monopolistic competition framework distinct from that of Chamberlin (1933). In both the Butters and Chamberlin formulations of monopolistic competition, the competitive part comes from a free-entry zero-profit condition that closes the model. The monopolist part in Chamberlin's work comes from heterogeneity of the products sold by firms; in Butters it comes from the market power that firms have due to the imperfect information that consumers do not know all firms' prices.

We meld Butters's approach with the advertising clutter approach formalized in Van Zandt (2004) and Anderson and de Palma (2009). Reception of messages is passive: the consumer does not search. This contrasts with Baye and Morgan (2001, 2002), who consider active consumers choosing whether to visit a price comparison site, and a “gatekeeper” firm charging access fees (with a single product sector which generates price dispersion from a mixed-strategy equilibrium). Our context corresponds to passively getting messages from bulk mail, television, billboards, and so forth. We focus on the interaction of multiple industries competing for individuals' attention. Whereas Butters generates price dispersion because each individual gets only a subset of the price messages (likewise Baye and Morgan, 2001, insofar as firms play with positive probability the option of not posting a price on the comparison site), in our model some messages are missed due to limited consumer attention. This reflects advertising clutter because an individual is bombarded by too many messages (in “junk” mail, billboards, television, and Internet pop-ups) to pay full attention to all.

Several authors model both the consumer's choice of how much attention to supply and the actions of firms vying for that attention by sending messages advertising their wares. In Falkinger (2008), consumers can choose how tight to make message filters but have a limited attention capacity, whereas in Johnson (2010), consumers choose whether to examine all messages or block them all. In Anderson and de Palma (2009), consumers have congested attention spans because they choose how many messages to examine. That article examines endogenous consumer attention, and the focus is on policy issues such as the Do-Not-Call legislation and monopoly versus personalized message pricing. Each message is from a different sector, and so prices are at monopoly levels in each sector.

In these models, the consumer's attention is a common property resource insofar as a message sender ignores the effects of its own message on other senders. This means there is a congestion externality, and a tax on messages can improve the allocation of resources.⁷ One concern with this conclusion of Anderson and de Palma (2009) is that direct business-stealing effects are closed down: message senders do not compete directly in the marketplace, they just compete for attention. A tax might a priori reduce price competition by reducing message volume, and so harm consumer welfare. We investigate this question by specifically modelling competition within each of several sectors vying for consumer attention. We focus on price dispersion and competition within sectors, along with the effects of changing the number of competing sectors and their costs of information transmission. Analyzing firm competition necessitates simplifying the consumer side of the model: it is assumed here the consumer's attention span is fixed outside the model.

Our equilibrium model has interaction both within and across sectors. Competition within a sector means that a lower price is more likely to be the lowest sector offer in the set of messages the consumer has screened. Nonetheless, higher-price senders can remain in equilibrium; there is a tradeoff between sales probability and mark-up, so all can earn zero profits despite price dispersion. Competition among sectors comes from overall competition for consumer attention, and price dispersion in each sector depends on all other active sectors.

The model endogenously generates an inverse independence of irrelevant alternatives (IIA) property for sector message fractions, and a constant elasticity of substitution (CES) form for the total number of messages sent. This bears an intriguing parallel to the CES utility functional form so often used to parameterize Chamberlin models. Information congestion gives a new rationale for the CES specification, but it is now coupled with price dispersion within multiple sectors.

The model also generates a different welfare prescription from Butters (1977). Although Butters's model has the optimal and equilibrium levels of information equal, we find that the market allocation can be improved by taxing messages.⁸ This reflects the property that advertising is excessive, in contrast to most of the theoretical economics literature on the subject (see Bagwell, 2007, for a survey). Indeed, the standard result in the economics of informative advertising is that there is not enough advertising because firms do not capture the consumer surplus. This is the monopoly result (see Shapiro, 1980, for example). Under oligopoly, this is somewhat offset by business stealing; overadvertising arises in the Grossman and Shapiro (1984) model of informative advertising when the business-stealing effect outweighs the consumer surplus one.⁹ Along similar lines, Stegeman (1991) shows that market advertising is insufficient when the Butters model is amended to allow demand to have some elasticity; firms then tend to overprice without sufficient regard to the consumer surplus lost. In our context, overadvertising is quite natural—even when demand is elastic—as it dissipates rents.

The next section describes the model and solution technique. Section 3 derives the CES form for total advertising and characterizes message volume by sector. Section 4 finds the advertising and sales price distributions by sector, and ties them into the earlier comparative static results. Section 5 sets out the normative properties, the neutrality result that no real changes ensue from transmission cost changes, the optimal allocation property, and the tax prescription to deal with overadvertising. Section 6 allows for non-commercial messages, which break the neutrality result but retain the basic CES form. Section 7 concludes. Appendix A gives a quick reminder of the Butters (1977) model.

2. Message reception and transmission

□ Assumptions

There are potential commercial sectors, indexed by . Each active sector θ comprises n_θ > 0 active firms.¹⁰ Each active firm sends just one message per consumer at a cost γ_θ (which can represent the cost of a letter, or the cost of a billboard divided by the number of consumers reached).¹¹ A message is an (ex ante anonymous) advertisement containing the price at which a consumer can buy the product from the sending firm. Firms within each sector produce homogeneous goods, and each sector therefore transmits n_θ messages, for a total number of messages (per consumer). The cost of producing the good advertised in the message is c_θ (which is only incurred if the good is bought—think of a pizza, for example); if the good must be produced beforehand regardless of whether the consumer buys, it suffices to set c_θ= 0 and fold the production cost into the transmission cost, γ_θ.

Consumers are assumed to be identical. Messages could be sent to them by bulk mail or by email, or they could be posted on billboards or on TV programs. However, reaching a consumer does not mean the message is registered. Each consumer has the same probability of registering a message (which means retaining the price offer). Because we assume constant returns to scale in production (constant marginal costs), we can treat the consumer as the unit of analysis and so we henceforth refer to a single consumer.

The consumer registers a fixed number of messages, φ≥ 1, which are drawn at random from the N messages sent. This reflects limited information-processing capability. In what follows, we will assume a condition (ensuring there are always some inactive potential sectors) that implies that not all messages sent are registered (φ < N) in order to capture advertising clutter/information congestion. After registering the φ messages, the consumer makes her purchase decisions. She chooses the lowest-priced offer received from each sector (we argue below that the probability of ties is zero) and buys q_θ units if that price is no larger than her reservation price for the sector, b_θ. The analysis extends naturally to conditional elastic demand (Section 4 below), but we retain the inelastic case for the main exposition for simplicity.

The model can also be interpreted as competition with traditional physical stores as follows. A consumer can buy a product in a store, or else she can receive an ad enabling her to buy it cheaper. For advertisers, her reservation price, b_θ, is the full price paid at the store. This full price will include her transportation costs, and so forth. The consumer may receive unsolicited ads from other sellers; to be entertained, they must be priced below her reservation price. Assume that traditional stores are competitive so that the store price is at the sum of marginal production plus distribution costs. Other sellers may have lower distribution costs (think bricks vs. clicks), and they might deliver the product more cheaply. Assume that consumers do not search out sellers but that they do know about the store option. Clearly, both types of goods can coexist—some products are available both in stores and through advertised offers; others are not available in stores. The model allows for this by judicious interpretation of the reservation price. In both cases, if an advertised offer is accepted at price p, the consumer surplus ascribed to the advertising sector is b_θ−p.

Finally, firms in each sector choose their prices from the same distribution (to be determined) and whether to enter or not (without observing the actual price choices of other firms). In equilibrium, the price distribution must satisfy the condition that no firm can do better at another price or entry/exit choice. This implies that active firms make zero profits, and that no entering firm can do strictly better entering with a different price (see Baye and Morgan, 2001, for a related analysis with a single sector and a gatekeeper).

□ Solution technique

An active firm's expected demand (at any price it may charge) is the probability that its message contains the lowest price that is registered from its sector. Its expected demand also must satisfy the zero-profit condition for the price charged. We equate the probability of making a sale at a particular price from these two different angles to find the relation between the price and the advertised price distribution.

The highest possible price set by any firm, b_θ, plays a key role because the only way the sender can avoid a loss at such a price is if it is the only message drawn from that sector. This ties down the number of messages n_θ sent from sector θ as a fraction of the total number of messages sent, N. Summing over sectors yields the total number sent, N, from which we can back out the number in each sector (the n_θs). Armed with that statistic, we can recover the equilibrium price distribution in each sector and its support. This technique also enables us to determine endogenously the equilibrium number of active sectors.

More formally, an equilibrium to the model maps the primitives into a set of nonnegative sector message numbers , which sum to the total message volume N. A sector is active if and only if n_θ > 0. For each active sector, the equilibrium specifies sector purchase probabilities, , for the consumer, a price distribution within each sector, and corresponding choice probabilities for each product , where denotes the probability of a sale at price p in sector θ. We show that equilibrium is unique, with an endogenous cutoff between active and inactive sectors. We proceed in Lemma 2 by determining message volume by sector as a function of the total message volume, N (to be determined later). We then sum over active sectors in Proposition 3, to find the N consistent with a given number of active sectors. Then, in Proposition 4, we identify the active sectors. Intermediate results describe properties of the solutions.

□ Message selection probability

We first seek the probability that a particular message is the only one registered from a sector. Assume that n_θ < N, so at least two sectors are active.¹² Given there are N messages in total, the probability of drawing any given message on a given draw is and the probability of drawing it in φ draws is . The number of messages from sector θ is n_θ < N, so that the probability of drawing a message from the same sector is . The probability of avoiding the sector on the φ− 1 other draws is then . Therefore,

• (1)

represents the probability that one (specific) message from sector θ is registered,¹³ and no other message is registered from that sector. This derivation assumes that search is with replacement and that drawing the particular message again results in no sale. This simplification works when there is a large number of messages so that (and in this case, search without replacement also gives the same approximation to the probability formula).

Indeed, the probability of getting the message on the first draw, and missing the rest of the sector on all subsequent draws, is . The probability of missing the whole sector on the first k− 1 draws, drawing the message on the kth draw, and missing the rest of the sector subsequently is . Thus, the chance of getting the message alone is the sum of these events, namely . This sum simplifies to . The first-order Taylor approximation (f(x) ≈f(x₀) + (x−x₀)f′(x₀) with and ) to the first term, , is , and so, to the first order, is given by (1).

□ Price distribution properties

There can be no equilibrium with all firms choosing the same price (and hence sharing the market): a common price above c_θ+γ_θ/q_θ could be profitably undercut; any price c_θ+γ_θ/q_θ or below would give negative profits.

We first argue that the support of the equilibrium advertised price distribution (for any firm in active sector θ) is a compact interval with no atoms or gaps, where the lower bound, , is to be determined below. There are no atoms in the price distribution because if there were, any sender choosing the same price as a mass of other senders would raise profits by infinitesimally cutting its price. This would leave its mark-up essentially unchanged but raise sales discretely because it then beats all others at the purported mass point whenever two lowest price messages are the same. The interval has no gaps on the support because, if there were, the lower price at a gap can be raised, leaving the sales probability unchanged but increasing the mark-up. This same argument implies the support must go up to b_θ: if it stopped short, the highest-priced firm could raise its price with no penalty on sales probability and increase its mark-up. Finally, the lower bound of the support must exceed c_θ+γ_θ/q_θ because at any lower price the transmission cost cannot be recouped. It must strictly exceed this bound because there is a positive probability that the message is not read (contrast Butters).

Lemma 1

Prices in industry θ are distributed on a compact support , where , and there are no atoms.

Let F(p, θ) denote the fraction of firms in sector θ choosing price p or below. (Then and F(b_θ, θ) = 1.) A message at price p is successful as long as the price is the lowest one received; using the same logic as used to derive (1), the sales probability is

• (2)

where we simply note that n_θF(p, θ) is the number of messages sent from the sector with a price below p.

We proceed in Section 3 by determining aggregate numbers of messages per sector and total messages, and in Section 4 we derive the price distribution for each sector.

3. Advertising levels

□ Advertising shares by sector

Consider an advertisement that is sent out with price b_θ. As (as given by (1)) is the probability this is the only ad found from sector θ, the equilibrium zero-profit condition (which will tie down n_θ) reads

• (3)

where we recall that q_θ is the quantity of good θ demanded. Define π_θ by

• 

which measures the economic performance (social surplus per $ transmission cost) of sector θ. It is necessary (but not sufficient) for an active sector that π_θ > 1 because (b_θ−c_θ)q_θ must exceed γ_θ in order for the sender to incur the cost of a message, given that messages are not read with certainty. Indeed, if , even a single message sent from sector θ at the highest price would not be expected to cover its costs; that is,

• (4)

where is the probability the message is registered.¹⁴ The zero-profit condition (3) for the equilibrium probability for a sender with price b_θ in active sector θ making a sale is then

• (5)

This probability depends only on the intrinsic economic performance index, π_θ, of the sector.

Let be the number of sectors for which π_θ > 1; this is the maximum number of active sectors.¹⁵ We rank these sectors such that π_θ is decreasing in the index θ, that is, from highest to lowest economic performance. For simplicity (except when we do the symmetric analysis), we will assume that all the π_θs are different across sectors. In the sequel, we will find the endogenous number of active sectors.¹⁶

Lemma 2

Let N > φ. All sectors θ such that are active sectors, and the rest are inactive. The relative sector sizes are

• (6)

Proof

Equating the probability derived from the zero-profit condition, (5), with the probability that she gets no other message from the sector, (1), implies , and so determines the ad market shares by rewriting this as (6). Hence, sector θ sends a positive number of messages if and only if . Q.E.D.

We defer considering the overall comparative static properties of equilibrium because N is still to be determined in (6).¹⁷ However, we can use the expression to compare across sectors of different economic characteristics within an equilibrium. Sectors with larger economic performance send more messages because they are more attractive to senders. That is, if and only if . We proceed by further characterizing the relation that sector sizes must satisfy at any equilibrium.

□ The inverse IIA property

Sector message sizes exhibit a type of IIA property in the sense that the ratio of ad market shares of two sectors depends only on their profitabilities for a given N. However, contrary to the usual IIA property (first pointed out by Debreu (1960) in his critique of Luce's (1959) Choice Axiom), which stipulates that the ratio of market shares does not change with the number and type of other options, this ratio does change here because N changes with the profitability of a third sector (see also (9) below). Thus, the standard IIA property does not hold for this model. However, a related IIA property holds, with respect to the market shares of all competing sectors. We call this the inverseIIA property, which pertains to the ratios . From (6), the inverse IIA property is¹⁸

• (7)

where is the number of active sectors. This is a property of invariance of the ratio of all rivals' advertising levels as the appeal of any rival (outside the pair) changes. Analogously to the way the IIA property implies the logit model (see Luce, 1959), the inverse IIA property implies an inverse logit formulation, as follows.

Proposition 1

At any equilibrium with active sectors, the non-θ shares have a logit form:

• (8)

where the left-hand side (LHS) is the nonshare of sector θ over the total nonshare of all sectors.

Proof

Inverting (7),

• 

Summing over θ′ gives , and the result follows directly by inversion. Q.E.D.

The (endogenous) value of is determined below. Only the active sectors are counted; inactive sectors π_θ are excluded from the summation. The same caveat applies below.

As π_θ increases, the right-hand side (RHS) of (8) falls; as the profitability of a sector rises, it produces proportionately more ads whereas the others produce relatively less. Even a mature sector may enjoy a higher profitability if γ_θ falls, perhaps because of the advent of a new medium which might complement advertising its goods and get larger ad market shares that come at the expense of the others.¹⁹ Indeed, as shown below, weak sectors might be pushed out of the market entirely. The effects of raising φ on the distribution of messages by sector are fundamentally those of the logit formulation (see, for example, Anderson, de Palma, and Thisse, 1992), although the derivation of that form above differs from the usual roots.

Proposition 2

For constant, as φ rises, the ad market share of the most profitable sector decreases with φ, and the share of the least profitable sector increases. As φ falls to 1, almost all messages are sent by the most profitable sector.

Proof

To show the first point, fix . The relation in (8) gives the fraction of messages in sector θ as . Note that , so that

• 

(where the symbol denotes that the derivative has the sign of the expression), or (as ),

• 

Hence, the share decreases with φ for the most profitable sector (1), and increases for the least profitable one (). Finally, note from (8) that

• 

Hence, : almost all messages are sent from sector 1. Q.E.D.

If the attention span is very limited (φ close to 1), virtually all messages are from the highest profit sector, 1, because this yields the greatest profit conditional on making “the” hit. The messages sent tend to quote the monopoly price because there is almost no chance of being undercut by another message. Monopoly prices are most attractive for the sector with the highest monopoly profit. The number of messages sent from this sector tends to π₁.²⁰ This corresponds to pure dissipation of the monopoly profit in sector 1. It is possible that there is a huge number of such messages if π₁ is very high; even if π₂ is high too (but strictly below π₁), it attracts virtually no messages. This case arises if the transmission cost for one sector tends to zero with the other sectors retaining positive costs; the sector crowds out all other sectors. This is clearly wasteful because all other sectors are closed out, whereas the affected sector just dissipates all the rents in excessive message transmission.²¹

At the other extreme, when the attention span is extensive, any price above the lowest in the sector will almost certainly be beaten. All sectors are very competitive, so sectors become equally (un)attractive; a lot of price competition means very few messages per sector.

When , the advertising shares of the intermediate sectors are not necessarily monotonic in the level of consumer attention, φ. To see this, consider three sectors. Sectors 1 and 2 have very high profits, with 2 slightly less than 1, whereas sector 3 has very low profit. When the attention span is slightly above one message, sector 1 is active whereas 2 is virtually silent. For middling values of φ, both 1 and 2 have almost half the market each. For φ large, all have around one-third shares. Sector 2's share is not monotonic here.

Expression (8) in turn gives rise to a familiar functional form.

□ Aggregate advertising

The next step is to determine the equilibrium message volume, N. Expressions (6) and (8) give two different expressions for m_−i. Equating them yields the following.²²

Proposition 3

The equilibrium total message size given active sectors and N > φ takes a CES form:

• (9)

Thus, N is increasing in each profitability, π_θ, and homogeneous of degree 1 in the sector profitabilities. Adding another viable sector raises N.

Proof

The properties are straightforward except for the last one. Consider introducing a “barely viable” sector s with n_s= 0; by (6), the corresponding performance of such a new sector s is π_s=N/φ. We now verify that introducing this barely viable sector s leaves (9) unchanged:

• 

Thence, by continuity, introducing a strictly viable sector, with π_s > N/φ, will cause N to increase even if some sectors exit. Q.E.D.

The CES form has well-known properties.²³ Raising the profitability of any sector causes the total volume of messages to rise because the extra clamor causes a larger total without a fully compensating backlash from the other sectors.

Notice that from (9), there are zero messages if (which case we rule out by assumption) and φ > 1. This could rather be interpreted as a single firm setting the monopoly price in one message; any other entrant rationally anticipates negative profit if it enters (messages from rivals are necessarily read, so price would go to marginal cost if there is more than one firm, so losses ensue). Section 6, by introducing an “outside” option, allows for a nondegenerate outcome with one active sector. Finally, as we noted in Proposition 2, there is effectively just a single sector active in equilibrium as φ↓1, in which case all firms from this sector strive to be the chosen one, and each sets the monopoly price b₁.

□ Sector viability

When sectors are asymmetric, some may be precluded by the strength of those in the market. We determine the equilibrium set of active sectors. Recall that denotes the number of sectors for which π_θ > 1 (any sector with π_θ≤ 1 is not viable, and so can be eliminated from the discussion). Furthermore, define by

• (10)

and assume that . As we show, this assumption on profits implies that there will be some sectors (all those with index above ) that do not advertise, and the existence of such sectors ensures that the congestion condition N > φ necessarily holds.²⁴

Proposition 4

Let satisfying (10). Then there exists a unique equilibrium; sectors are active, and the total volume of messages is given by (9), with .

Proof

From Lemma 2, a sector is active in equilibrium if , where denotes the number of messages for active sectors as given by (9). Next, we show there is a unique cutoff between active and inactive sectors. The condition for a sector to be active is . Given the ranking of sectors, the LHS decreases in the marginal sector, , whereas we showed in Proposition 3 that the RHS increases as sectors are added. Thus, there is a unique solution for , and it is given by (10), where the term in the middle is (see (9)). Notice that necessarily the congestion condition holds; as by (10). Q.E.D.

It remains to show that the equilibrium follows the ranking; there cannot be an equilibrium with some sector θ excluded although some sector θ′ > θ is included. If there were, then the profit from sending a single message from sector θ (at its monopoly price, b_θ) is . However, messages sent from sector θ′ return a profit of at most . Hence, because , a message from sector θ would supplant one from sector θ′, so the starting point cannot be an equilibrium.²⁵

Viability constraints imply that equilibrium congestion across sectors may close down a sector when another sector becomes more attractive. Similarly, a newly entering or improved sector raises the congestion on the incumbents. This we illustrate next.

□ Raising a sector's profitability

Proposition 3 shows that an increase in a sector's profitability will increase the total number of messages sent (even if this causes exit of other sectors). Because the other sectors all send smaller shares of this larger total, the affected sector must send more messages. We now determine what happens to the other sectors. Recall from (6). Hence, for an unaffected sector (where π_θ has not changed), it is clear that the sector share goes down. However, it is possible the number of messages it transmits goes up, as we now show (that is, we show that can be positive). Indeed, has the sign of as . From (6), we have the derivative²⁶

• 

Substituting from (9) and defining and as the average value of χ_θ gives

• (11)

From a symmetric starting point (where for all ), has the sign of , which is negative if and only if . If, though, , a marginally higher attractivity in one sector causes message numbers to rise in all sectors. This result is broadly consistent with the rising part of the information hump (low φ) and for the early “take-off” part of the Information Age evolution depicted in Figure 1. There is a relatively large increase in the number of messages sent as long as the amount of competition is small.

Figure 1. TOTAL MESSAGES, N, AS A FUNCTION OF THE NUMBER OF ACTIVE SECTORS,

In the asymmetric case, (11) indicates that there is a cutoff value of χ_θ for which is negative for higher χ_θ and positive for lower χ_θ. Because π_θ is inversely related to χ_θ, this means that larger sectors are more likely to see an increase in the number of messages sent. A summary proposition follows.

Proposition 5

The equilibrium total message volume increases as any sector becomes more profitable. The improved sector sends more messages both relatively and absolutely. All other sectors diminish in relative importance, but sufficiently profitable sectors may increase in absolute size.

It may seem surprising that some sectors could increase in size despite more competition and even though sectors are linked only through the negative effects of congestion (there are no demand complementarities, for example). The favored sector increases in size. This has two contradictory effects on other sectors. First, any given message is less likely to be found. However, any rival's message is also less likely to be found. The first effect impacts all industries equally. The second favors the larger industries because each firm has more competition, so these industries will attract new entry.

□ The Information Age

The key driver of the Information Age is lower communication costs. The homogeneity property of the CES function for N in Proposition 3 implies that total message volume doubles if all communication costs are halved. No further sectors will enter, because doubling of the existing message volume will preclude them, even if their transmission costs halve. Indeed, suppose that is an equilibrium before any change, so , and we want to show that the same is an equilibrium after costs change. From Proposition 3 (see (9)), then keeping the original number of sectors fixed implies that a drop for all γ_θ to a fraction k of their former value raises N to (see (9)). But then the condition for any sector s to be out of the market still holds () when each γ_θ is reduced to kγ_θ (see also (10)).

Lower communication costs are one obvious cause of a surfeit of information; spam email is an everyday manifestation of the problem. Any such cost improvement is offset by the rise in messages sent, so all improvements are completely dissipated.²⁷ As we show in the next section, price dispersion also remains unaltered, and this leads to the neutrality result given in Proposition 11 that welfare remains unchanged.

However, even though a uniform cost reduction does not cause new sectors to enter, improved communication may help some sectors more than others, insofar as some are better suited to having their ads embedded in the new media. This communication-enabled access for some sectors leads us to now consider a larger set of viable sectors. The exercise can be thought of as cost reductions in hitherto excluded sectors (or, indeed, as new product classes, such as PCs and software, coming to market).

We consider the symmetric case before returning in the next section to the asymmetric one. For the symmetric analysis, we will assume that all potential sectors are active.²⁸ Then, with π_θ=π > 1 for all , the expression (from (9)) for the total number of messages, N, reduces to²⁹

• (12)

Having more sectors, , raises the total number of messages. The number N is a logistic function of the number of sectors; it is first convex (for ), and then concave, for . If we were to view the number of (new) sectors as arriving at a constant rate, then this means the amount of information would accelerate at first (the take-off of the Information Age) before tapering off, reminiscent of the Bass (1969) diffusion of innovation model. Indeed, the amount of information has an asymptote of , which is the bound to the amount of information the system can sustain.³⁰

The average number of messages per sector, , is increasing in if and only if , so it is eventually decreasing (for large enough). The initial increase is explained by the idea that more sectors mean less competition, and so higher prices and more incentive to send messages. The logistic function in (12) is sketched in Figure 1, for π= 20 and φ= 20 (the function asymptotes to N= 400, the maximal value of is the slope of the dashed line from the origin attained at , and the inflection point is at ). The other comparative static property of N, with respect to φ, is described next.

□ The information overflow hump

The advent of new media means more consumer time is now spent with ad-carrying activities, such as surfing the Internet or sending email. It is plausible that the overall consumer attention span has increased as more hours are spent on media. The thumbnail capture in the model of this increased span is to raise φ.

From the symmetric analysis (see (12)), we can see that the information level, N, is decreasing in the attention span, φ if and only if , and so N is necessarily decreasing for (as ; the LHS is decreasing in and goes to 1 as goes to infinity). Likewise, is falling in φ, and therefore N increases more slowly than φ.

Figure 2 plots the relation of N as a function of φ for π= 100 and (hence attains its maximum at , which is slightly less than 10). The dashed line is the line φ=N. Figure 2 shows the quasiconcave function, that is, first increasing, then decreasing with the attention span, φ. This we term the information overflow hump. However, the number of messages only increases for low (). More attention has two conflicting consequences. First, it raises the probability a message from the sector is seen, which raises profitability, and hence the number of messages sent, ceteris paribus. But it also has the effect of increasing price competition (the price distribution shifts down), as it is more likely a lower price will be found in the sector. This reduces profitability and leads to a smaller number of firms (messages). For low φ, the price competition effect is weak in that it is quite unlikely that another message received will be from the same sector as one already received; extra messages will most likely come from unrepresented sectors. With high reception rates, the price effect dominates. In a nutshell, for low φ and given , more examination leads to more messages sent as undiscovered sectors become more likely to be found. For higher φ, more examination means more hits in the same sector, which increases price competition and so decreases sector activity.

Figure 2. TOTAL NUMBER OF MESSAGES SENT, N, AS A FUNCTION OF ATTENTION SPAN,

We now turn to the price distribution, whose properties underpin the economics of the results so far.

4. Equilibrium price dispersion

▪ The equilibrium sales probability corresponding to a particular price p in sector θ can be determined independently of the other sectors. However, we need to bring in the other sectors to determine which prices are actually used in equilibrium. The equilibrium sales probability for a message announcing price p in sector , is given simply from the zero-profit condition as

• (13)

where for all p in the interior of the support of the equilibrium price distribution. The above expression reduces to the zero-profit condition (5), when p=b_θ, and using the notation .

The equilibrium sales probability above is decreasing and convex in p. We next want to use it to determine the equilibrium advertised pricedistribution. This is done by equating in the zero-profit condition (13) to the expression given in (2) for the probability of there being no lower price drawn, which gives

• (14)

where n_θ/N is given by (6).

Proposition 6

The equilibrium advertised price density in sector θ is decreasing and convex on , with (truncated) Pareto distribution

• (15)

where N is given by (9) and is given by

• (16)

Proof

The equilibrium advertised price distribution is given from the relation (14) as

• 

Recalling that from (6), we can write (15). It is readily checked that F(b_θ, θ) = 1.

As , the lowest price in sector θ is determined by (14) as

• (17)

Then (16) follows immediately. The corresponding density, f(p, θ), is strictly positive on , where it is decreasing and convex (as shown by differentiation of (15)). Q.E.D.

The distribution for sector θ depends on the other sectors through N, giving a simple general equilibrium effect. For given N, we can derive the price distributions by sector independently, as consumer surpluses by sector are additively separable and consumers are not budget constrained.

The intuition for the lowest price in the support is straightforward. A message sent at this lowest price always beats all the other messages from the sector. Hence, the sales probability is just the probability that it is read at all, which is simply as it has φ shots from a pool of N messages. Equating this probability times the mark-up to the cost of sending the message gives (16).

As in Butters (1977), lower prices are advertised more heavily. In the Butters model (with q_θ= 1), the corresponding lowest price, , would be simply c_θ+γ_θ, because such a price just covers the cost of production plus sending the message. In the Butters version, the lowest price must always get a sale because there is no information congestion, and no possibility that the message remains unread. In contrast, here the lowest price in any sector does not always make a sale. Information overflow pushes up the lowest price in the support, which is needed to compensate for the likelihood that the message may not be received.

The simplest measure of price dispersion is the breadth of the support of the equilibrium prices. This is , where . Ceteris paribus, dispersion is smaller the greater is (recall, though, that N depends on all the parameters of the model, apart from the inactive sectors' profitabilities). Hence, for example, a larger γ_θ decreases N and so increases dispersion in all unaffected sectors, although decreasing dispersion in the affected sector (see (9)).

Changes within the sector affect the support as well as the aggregate message volume N. A sector can become inviable if it faces tough competition from other sectors and/or is quite unattractive itself. Viability can be expressed as the condition that the price support does not collapse. That is, . From (17)), this means that ; this is the same condition from (6) for n_θ > 0 in equilibrium.

□ Conditional downward-sloping demand

The analysis still goes through when sectors have conditional downward-sloping demands. Suppose that the consumer will buy q_θ(p) from sector θ at the lowest price, p, held. Assume that demand begets a quasiconcave profit function with a maximizing price . The corresponding profit (conditional on being the only message registered in the sector) is , and so the profit per dollar transmission cost is , which therefore plays exactly the same role as does π_θ above. In equilibrium, no firm will charge more than because profits can be increased by charging , and the parallel analysis to that above yields the equilibrium price distribution as

• 

(cf. (15)), where N is given by (9) with replacing π_θ. Now is given implicitly by (cf. (16)), which has a unique price solution for under the assumption that profit is strictly quasiconcave.³¹ Compared to the distribution for rectangular demand (setting and treating q_θ as invariant), the distribution is now stochastically lower (first-order stochastic dominance) because lower prices are relatively more attractive due to the demand expansion effect. It is not just the positive analysis that extends cleanly to this case—so does the normative analysis of excessive advertising (see Proposition 11 below and the discussion following it).

□ Advertised price dispersion and sector profitability

Greater sector profitability impacts the affected sector by increasing the volume of messages sent (Proposition 3). As we now see (Proposition 7), this increases price competition, and so stochastically lowers prices. However, this market mechanism spills over into the other sectors. Elsewhere, price competition is reduced because sector messages are crowded out in relative terms. Nonetheless, the number of messages sent in other sectors can actually rise (see Proposition 5) because the reduced price competition can raise profits per firm (which then must be reduced by further entry).

Proposition 7

An increase in the profitability, π_θ, of one sector decreases prices (and increases the support of price dispersion) in that sector and increases prices (and decreases the support of price dispersion) in the other sectors, in the sense of first-order stochastic dominance. A proportional increase in the attractivity of all sectors leaves the price distribution unchanged.

Proof

Recall by (15). Hence, (for θ′≠θ) has the opposite sign from , which is positive, as already established. Hence, F(p, θ) decreases in . However, has the opposite sign, because is decreasing in π_θ (from (9)). Hence, F(p, θ) increases in π_θ. If π_θ increases, falls; if increases, N rises so that rises (see (16)). If all sectors increase proportionately in attractivity, is unchanged (by the homogeneity in Proposition 3) and so F(p, θ) is unchanged. Q.E.D.

This means that advertised prices (and price dispersion) can be negatively correlated across sectors. If one sector becomes more desirable (in the sense of higher surplus), prices fall in that sector as competition intensifies. But the additional messages crowd out messages in other sectors, and this relaxes competition in those other sectors. On the other hand, across-the-board changes affecting all sectors can leave prices the same. This property underlies the result in the next section that proportionately lower message transmission cost savings are dissipated fully; equivalently, a (proportional) tax might be raised without deadweight loss.

The sales price distribution differs from the advertised price distribution because lower prices are more likely to get sales, and also because even the lowest advertised price does not always make a sale. The earlier version to which we refer is online (http://www.virginia.edu/economics/Workshops/papers/anderson/butter090401.pdf). We now follow through with the analysis of the symmetric case.

□ Dispersion and symmetric sectors

In the symmetric case, N is given by (12) as , and so the cumulative distribution function for advertised prices (15) becomes

• (18)

where (by (16)). Hence, as φ rises, the lower bound falls, and so intrasector competition rises in this respect. A tighter characterization is quite immediate.

Proposition 8

Assume sectors are symmetric. A higher attention span, φ, lowers prices in the sense of first-order stochastic dominance.

Proof

From (18), F(p, θ, φ₂) > F(p, θ, φ₁) as , or φ₁ < φ₂. Q.E.D.

Lower prices as attention goes up underpins the earlier comparative static results of the information hump. Even though the total message volume is not monotone (see Figure 2), the price effect is. For low φ, prices are high and few messages are sent; for high φ, prices are low and few messages are sent. In the first case, because few messages are registered, firms may as well set high prices and chance the low probability of another message from the same sector. In the second case, price competition intensifies because there is a strong likelihood another message from the same sector will be read.

Along similar lines, it is readily shown that higher stochastically increases prices (with more price dispersion). This is because the limited attention is more divided. We now turn to the normative analysis.

5. Normative properties

▪ We first undertake a welfare analysis of the performance of the market equilibrium and emphasize the excess of information. In the following two subsections, we consider cost changes and transmission taxes—even cost increases without any corresponding revenue collection can improve the allocation. These results stress the extent of the market failure, and also help indicate which sectors are particularly responsible.

One strong property of the Butters (1977) model is that the market allocation is optimal. However, this property crucially depends on his assumption that each message hits somewhere.³² In our setup, there is rent dissipation and socially wasteful duplication of messages.³³ Competition for attention imposes a congestion externality which leads to excessive advertising; this feature is perhaps more in tune (rather than optimality or underadvertising) with one's personal reaction to advertising clutter.

The welfare function is given by summing over sectors the total sector surplus times the probability a sale is made in the sector, and then subtracting the message costs. Define

• (19)

as the probability that there is at least one hit in sector θ, the probability that each of the n_θ messages is missed on each of the φ draws. Notice that

• (20)

Thus, the increased chance of discovering a sector when an extra message is sent is the probability that the extra message is registered when no other message from the sector has registered. We can write the welfare function (for any values ) as³⁴

• (21)

where . This form (breaking out N as a separate argument) is convenient for what follows.

Proposition 9

The social benefit from an extra message in sector θ is equal to

• (22)

where the RHS terms are private-sector profit and congestion externality, respectively. The total number of messages transmitted is excessive in equilibrium, and the (negative) congestion externality is measured as the average transmission cost, , where the superscript e denotes that the variable is evaluated at its equilibrium value.

Proof

From (21), we have ; noting that (message anonymity) gives the first inequality in (22). Now, from (21) and (19), and then using (20), we have that

• (23)

This expression is the profit of a firm setting the top price in active sector given n_θ messages emanating from the sector (see (5)). Given this is zero in equilibrium, the remaining term, ∂W/∂N, is naturally interpreted as the congestion externality from active sectors, and . From (21), we have for active sectors

• (24)

Using the zero-profit condition (3), we get

• (25)

that is, the congestion externality is strictly negative and equal to (minus) the average transmission cost. Q.E.D.

This result underscores the main problem with the market equilibrium; although (as we show next) the allocation is (second-best) optimal across sectors given the total equilibrium message volume, the overall volume is excessive. This is seen clearly from what we just argued in Proposition 9, namely that (i.e., evaluated at the equilibrium), whereas . However, although optimal and private incentives are aligned in terms of allocation, the private choice ignores the message-crowding externality on all other sectors, which is measured by . The social cost of an extra message, as per (25), is the average sending cost. This relation holds because if extra messages have to be sent, they should be allocated across sectors in proportion to the sector representation in the population; one more message therefore costs the average transmission cost.

Proposition 10

The equilibrium allocation of messages across sectors is socially optimal given the number of messages transmitted at the equilibrium.

This is proved in Appendix B. The intuition is as follows. First, the congestion externality is the same regardless of which sector sends an extra ad (the term ∂W/∂N). Second, the welfare from an extra ad is the probability it is seen, weighted by its social contribution, minus the sending cost. As with the Butters model, this is the profit of the top firm, and so is zero for all sectors.

□ Increasing transmission costs uniformly

We first establish a strong neutrality result for across-the-board cost changes. Uniform transmission cost decreases raise advertising levels (and industry sizes) proportionately, but they do not affect the real outcome. Indeed, the economics of lower transmission rates are the economics of rent dissipation. Halving the cost in each sector simply doubles the number of ads sent because both N and n_θ are homogeneous of degree −1. The sector choice probabilities (n_θ/N) are then homogeneous of degree 0 in the percentage cost increase. The advertised price distribution, F(p, θ), is then also independent of such cost changes. This also explains why no sectors enter; halving transmission costs also halves the chance the highest-priced sender makes a sale (because it faces twice the competition). Because optimal taxes are positive, we phrase the next proposition in terms of a cost rise.

Proposition 11

A uniform percentage increase in transmission costs leaves welfare unchanged. Hence, a uniform percentage tax raises welfare. Price dispersion remains unchanged, as does the fraction of messages sent per sector. The number of messages per sector (and therefore the total) goes down in proportion to the percentage cost increase. The number of active sectors remains the same.

Proof

A common percentage transmission cost increase, s, raises each γ_θ to γ_θ(1 +s) and so reduces each π_θ proportionately to . From (9), N(s)(1 +s) is constant, where N(s) is the equilibrium aggregate message volume under common cost increase s. Equivalently, the original N(0) falls to . Recall from (6). As the ratio (on the RHS) is unaltered by the cost increase, then so is the ratio (on the LHS). Likewise, as is unchanged, the price support and the price distribution stay the same. A sector is active iff . However, because N(s)(1 +s) =N(0), the condition remains unaltered. Consumer welfare therefore is unchanged, profits remain zero, and so welfare remains unchanged. The tax result is an immediate corollary. Q.E.D.

Any tax not lost in the collection is therefore a social gain, and gets transferred purely from costs. As profits are zero, consumers are just as well off because they face the same situation (same distributions, but fewer overall messages). The tax is therefore raised without deadweight loss. The same argument applies when conditional demand is elastic (Section 4). That is, profits remain zero, and the distributions remain the same because remains the same, so consumers face the same situation in the presence of an equal-percentage transmission tax. Consumer surplus is therefore unchanged.

Proposition 10 showed that the base allocation of messages was optimal for the equilibrium message volume, N^e. By Proposition 11, an equal-percentage tax on transmission scales back messages proportionately. However, unless transmission costs are the same across sectors, the scaled-back message levels induced by a nonnegligible tax are not optimal for the new (given) total volume of messages. Indeed, the partial welfare derivative (23) is , whose expression still holds in the presence of a tax which is fully redistributed back to consumers (although the arguments in are proportionately smaller). These partial derivatives are still to be equalized across sectors at any constrained optimal allocation for given N^e. However, the market equilibrium condition in the presence of a proportional tax, τ, on transmission becomes . Substituting,

• (26)

This means that the allocation is constrained optimal (all the ∂W(n^e, N^e)/∂n_θ are equal) either if τ= 0 (where we evaluated the earlier welfare derivative) or if all the transmission costs, γ_θ, are equal. Otherwise, ramping up the transmission cost with a tax causes an allocative distortion; from (26), the higher-cost messages ought to be provided more (and the lower-cost ones less). This means that the cheaper messages tend to be overused in equilibrium (in the presence of the tax). These are the ones associated with the most dissipation, ceteris paribus.

This suggests that the low transmission-cost sectors are overrepresented in the population of messages (in the sense that they ought to be scaled back more than proportionately). Although the proportional tax does not affect choice probabilities, the fact that the allocation is not optimal if transmission costs are unequal means that the optimal tax (given a target N) is not a proportional one. Instead, the tax should fall more heavily on the cheaper message communications; from (26), the sector-specific tax rate that ensures all sectors have the same marginal social benefit entails τ_θ inversely proportional to γ_θ.³⁵

□ Specific cost increases

Proposition 10 suggests that low transmission-cost sectors do not inflict more damage on high transmission-cost ones, or vice versa, at equilibrium. All sectors are in excess, but no group should be singled out.

This result leads us to ask whether an increase in the sector's sending cost can improve welfare. As we shall show, such an increase cannot help if all sectors are the same, but it can if they are sufficiently asymmetric. Loosely, cost increases may help in sectors with low transmission costs (relative to surplus) and those with low surpluses.

Proposition 12

Welfare can rise when transmission costs increase in sectors with low profitability or with low transmission costs. Hence, welfare rises from a transmission tax on such sectors.

Proof

From (21), and because at equilibrium for active sectors, the relevant welfare derivative is

• 

This expression indicates that there is a tradeoff. From (25), ; from (9), we have , where we recall that is the average value of . Pulling these expressions together, the derivative condition is

• 

Under symmetry, a rise in one sector's transmission costs has no effect at the margin, as dW/dγ_θ= 0.

To deal with asymmetric sectors, it helps to rewrite the above expression as

• (27)

where Γ_θ=n_θγ_θ is the aggregate transmission cost for sector θ, and is the average of these. Equation (27) shows that it will typically be beneficial to increase costs on some sectors; the two effects in go in different directions. Consider two special cases. First, suppose that two sectors have the same transmission cost, and one is more profitable than the other, so it also has a higher equilibrium industry size (number of messages). Then Γ_θ is smaller for the less profitable one, and χ_θ is larger, so is larger for the less profitable one. Second, suppose that two sectors are equally profitable, so they have the same equilibrium industry size (number of messages). If one has a higher transmission cost than the other, its Γ_θ is larger, and so is smaller. A cost increase in the sector with the larger transmission cost has a relatively smaller effect; profit is not changed much so there is little reduction in congestion, but the higher cost is borne over a large market base. The same cost increase in the smaller cost sector has a larger effect on profit, π_θ, and so causes a much larger reduction in message congestion; it is borne over a smaller base as the sector contracts more.

Thus, higher transmission costs are beneficial, ceteris paribus, in less profitable or in low transmission-cost sectors. The tax result is an immediate corollary. Q.E.D.

The analysis of this subsection indicates the low-profit products and those with low transmission costs as being socially harmful. This holds despite them having a small foothold; one might have otherwise suspected high-profit products because they are responsible for the most crowding. The previous subsection also points the finger at low transmission-cost products as being overrepresented when all messages are scaled back proportionately by a proportional tax. Thus, these results take different perspectives on the “blame” issue, but reach similar conclusions.

6. Noncommercial messages

▪ The strong neutrality property of Proposition 11 relies critically on the lack of outside competition for attention, which also implies the homogeneity property in (9). A natural way to relax this property is to introduce another source of competition for attention. This amendment retains a basic CES form and the broad comparative static properties, but now transmission-cost changes have real effects; a lower cost raises the chance of finding the sector, and decreases prices. However, taxing messages remains optimal.

Think of consumers as having a limited amount of time, or a limited attention span. Jostling with the price of Microsoft Word or a supermarket flyer for pork chops is a really important email from a dean or a crying child. We model this outside competition for attention as further “distractions” to attention. Formally, let there be n₀ (exogenous) other messages (or activities) that compete for attention, so now . Assume an exogenous social value π₀ > 0 to eachoutside message (or activity) examined (the positive value reflects that the individual allows the distraction).

□ Message volume with noncommercial messages

With outside messages, each active sector's message share is still (see (6)). To find the total number of messages, N, now means adding in the outside sector, so , which yields a quasi-CES form

• (28)

The LHS is linear in N (with a positive intercept), and the RHS is convex (and starts at 0), so that there is one intersection with N > 0, which is thus the unique solution. The comparative static properties of the equilibrium are quite simple, and concur with previous results. One new one; a higher value of n₀ leads to a higher N, and n_θ falls in all other sectors.

However, now there is a real effect of uniform cost changes. To see this, suppose that γ_θ falls to γ_θ(1 +s) for all θ > 0 (with s < 0). Then (28) becomes , and clearly N rises when s falls. From the same equation, a higher N also entails a lower value of N(1 +s). This means that a lower cost per message now raises the number of messages less than proportionately. From (6), each active sector's share of the larger message total is bigger, as well as being larger in absolute terms. This is reflected too in the equilibrium price distribution; from (15) and the arguments of Proposition 7, noting that N/π₀ rises, the lower cost decreases prices (in the sense of first-order stochastic dominance).

□ Welfare analysis

We first show that there is still the right allocation of N (cf. Proposition 10), but too many messages. The welfare function is now written as

• (29)

where n₀ noncommercial messages vie for the attention span of φ given N total competitors. The proof follows the lines of the earlier one. For any given N, the partial derivative marginal benefit expressions (which are to be equalized across all sectors in the second-best problem of choosing the optimal allocation of N messages) are the same as those given before, and so the equilibrium still has the “right” allocation of messages across sectors, but too many messages (given π₀ > 0).

We already showed that a uniform cost increase reduces the number of messages, and has real effects which harm consumers because prices rise. Nonetheless, we now show that a uniform percentage tax on all sectors (except the “untaxed” sector, n₀) still raises welfare. From (29), the effect of a tax is .³⁶ Evaluating at τ= 0 yields again the result that the equilibrium entails, , where the zero comes from the zero-profit condition, as seen before. Hence, , and we know . Also, , because each term is decreasing in N and the additional term, , is decreasing in N (given that π₀ > 0). Hence, welfare increases locally from a uniform percentage tax. Here, a tax has the additional social benefit of rendering more prominent the noncommercial messages.

7. Conclusions

▪ The Information Age is characterized by a surfeit of information sent at relatively low cost. Modern economies involve many media which catch the attention of prospective consumers, so attention spans may be larger than ever before. Yet modern economies also involve many product classes. These factors interact to determine information congestion and the consequent degree of competitiveness of sectors. Below we bring together some of the key results.

First, new product classes may displace others by crowding information spans. Total information volume rises, although sufficiently strong other sectors may see a rise in size because crowding relaxes price competition, leading to stochastically higher prices. This encourages messages when the enhanced profit effect dominates the direct crowding effect.

Second, ceteris paribus, increasing the number of product classes causes an initial acceleration in the volume of messages as crowding raises prices, making more ads profitable. Eventually this tails off, in a classic S-shaped (logistic) volume relation over time, with an upper bound to message volume.

Third, if consumer attention rises, prices fall stochastically as competition is enhanced. This gives rise to the information hump; information volume initially rises as it becomes easier to get messages across. But the lower prices eventually come to dominate as it becomes less profitable to send messages, as it is likely that other offers register with the consumer. This suggests that both more attention and more product classes raise the volume of information. Eventually, though, the attention span effect reduces information volume and increases competition. Thus, whether prices get lower depends crucially on whether attention rises “faster” than the range of (desirable) goods.

Some caveats to the analysis constitute further extensions. The model is one of firms seeking (passive) consumers through ads, which can be thought of as the pure couch potato model. The converse case has consumers seeking opportunities through search. Indeed, both sides can be active, as in Baye and Morgan (2001). One step in this direction is to allow the attention span to be endogenously determined by equating the expected surplus from an extra ad to the marginal cost of paying more attention; the current specification is a simple version of this with prohibitive marginal cost at φ. Likewise, messages are assumed to be sampled randomly, so there is no allowance for the consumer to pay more attention to particular message types or filter out others. Information congestion and the economics of attention have yet to be fully fleshed out in these broader directions.

Appendices

Appendix A

Comparison to Butters model

Butters (1977) supposes M consumers and a single sending sector (so we can suppress the subscript θ in what follows). Letters are sent randomly, and each message reaches only a single consumer (ours potentially reaches all consumers). Consumers examine all the messages received, and each buys at the lowest price received. As with our model, the equilibrium price support has no atoms, no holes, and runs up to b. It starts at c+γ, because a message at that price is surely read by whoever receives it, and it is a winner (in our model, it must start higher because even the best deal may be unread).

We follow Butters in equating the probability of a sale from two different perspectives. The first is the zero-profit condition, . The second is the finding probability for the price p. For the price b, the likelihood of finding an empty letter box (the only way for the highest price to make a sale) must therefore equal . This is thus the fraction of the market unserved, and so is a key statistic in comparing equilibrium to optimum.

The corresponding welfare function is W= (b−c)MΛ−γN if N messages are sent, where Λ is the fraction of consumers informed. Hence, the optimal number of ads is determined from ; this equation suggests that an exponential form for the probability of finding an empty letter box will give equivalence with the equilibrium. This remark underscores the formulation of Butters's letter box technology. To derive this, note that the probability that at least one of N letters sent reaches a particular one of the M letter boxes is . When M is large, this is approximately 1 − exp (−N/M) (=Λ). Hence, , from which it follows that the number of uninformed at the optimum is , the same as in equilibrium.³⁷

Finally, consider the equilibrium advertised price distribution in the Butters model. Let the number of letters priced below p be A(p) (which therefore replaces N in the logic of the previous paragraph). Hence, the probability of a letter missing all lower-priced letters in a mailbox is exp (−A(p)/M), which must equal by the zero-profit condition. The form of A(p) and its properties (decreasing, concave) follow directly.

Appendix B

Proof of Proposition 10

Let N be given at the equilibrium level stipulated by (9), which we denote as N^e, and we wish to show that the division of these messages effectuated in equilibrium is optimal.

First, note that maximization of W(.) under the constraint that the nonnegative n_θs sum to a given value of N is a maximization problem of a continuous function on a compact set and therefore must have a solution. Therefore, at least one of the n_θs must be positive; call this sector j.

Second, substituting the constraint into enables us to write the maximand as , and we now show that is concave in the arguments (for given N), where the notation [n_j] denotes that the corresponding argument, n_j, is excluded. Indeed,

• 

Recall that the sum of concave functions is concave. The terms in the transmission costs γ are linear in , whereas for , the terms are concave in its own n_θ. There remains the term (by definition (19)); the summation term is linear in the n_θ, given N; hence, raising this to a power φ > 1 gives a convex function, and one minus a convex function is concave, as desired.

Third, because is concave, and is maximized over a compact and convex set, it has a unique maximal value. Let a solution be denoted , with , and let be the corresponding Lagrangian multipliers. The solution maximizes if and only if solves the Karush-Kuhn-Tucker conditions. This means that

• 

By (23), we have . Therefore,

• ((B1))

By the zero-profit condition for active firms (3), if n_θ > 0; but for inactive sectors (see (4)). This means that the market allocation solves (B1), and so induces the maximal and hence the maximal W(.) under the constraint. In other words, as per (23), by the zero-profit condition for the highest-priced sender in sector θ, and so the equalization condition is guaranteed at the equilibrium N^e.

Footnotes

• 1

  Skeptics point out that one would have to see an ad every 10 seconds for 8 hours to reach 3000 ads per day (although, in riposte, people now spend nine hours a day with media!). Websites can easily include 10 ads, and by one estimate we view 2000 websites a day. Commuting in a built-up area gives multiple billboards and signs per minute, not to mention the number of ads per page in newspapers.

• 2

  Dreze and Hussherr (2003) asked subjects to perform five searches using three Internet portals on which banner ads were displayed. Less than half reported seeing any banner ads, and there was no significant difference in recognition levels between real and fake ads shown afterward.

• 3

  A Nielsen Media Research survey in 2000 phoned households and then called back after 10 p.m. Less than 15% of respondents could cite an ad from the last ad break in the program they were watching at the time of the call. (Details are available at the Cabletelevision Advertising Bureau website, http://www.thecab.tv.)

• 4

  Here are CPMs for 2002 (http://bpsoutdoor.com/article.php?article=how_effective): billboard (30-sheet poster), $2.05; radio ad (during prime drive time), $8.61; magazine (one page with four colors), $9.35; television commercial (30 seconds on a prime-time network), $17.78; newspaper (one third of a page in black and white), $22.95.

• 5

  Indeed: “While television is still by far the dominant medium in terms of the time average Americans spend daily with media at 240.9 minutes, the computer has emerged as the second most significant media device at about 120 minuts.” (from http://www.marketingvox.com/study_most_waking_hours_spent_with_media-020005).

• 6

  “The average person spends about nine hours a day using some type of media, which is arguably in excess of anything we would have envisioned 10 years ago” (from the same source as the previous footnote).

• 7

  However, if the consumer's attention is not congested, a tax may worsen the allocation insofar as message senders do not internalize the consumer surplus from contacting prospective clients.

• 8

  This finding reinforces the conclusion of Anderson and de Palma (2009) of the desirability of a tax on transmission.

• 9

  Excessive advertising is also found in the controversial Dixit and Norman (1978) paper on persuasive advertising.

• 10

  In Section 3, we discuss how these sectors are endogenously determined.

• 11

  Indeed, in equilibrium, no sender would want to send a second message; to do so would give a negative profit, given the original message just made zero profit under the free-entry assumption below.

• 12

  As will be seen later, this will be true under mild conditions.

• 13

  Hence , because we shall below show that a sale at the top price sent, b_θ, only happens when the message is the only one drawn from the sector.

• 14

  As we shall see below, this is also the condition for the lowest price in the price support to be below b_θ. (For the lowest price, γ_θ equals the mark-up times the probability of being drawn. The latter is φ/N because a sale is guaranteed for the lowest price in the sector, conditional on being drawn. As the critical value of the low price is b_θ, the condition follows immediately.)

• 15

  The model is degenerate if there is a single sector; see the discussion in Section 3.

• 16

  As we show below, there will be at least two sectors under the mild condition that π₂ > 1.

• 17

  The condition N > φ in Lemma 2 will be satisfied under an assumption on sector profits (see (10)).

• 18

  Therefore, , which indicates that IIA does not hold, where Ψ_θ is defined in (8).

• 19

  We see in Section 3 that the number of ads from sector θ′ may actually rise if that sector is sufficiently attractive.

• 20

  This can be seen as follows. If N messages are sent, all from sector 1, and one is drawn, then monopoly pricing implies the profit from a message is . The zero-profit condition implies the number of messages is π₁.

• 21

  As we shall see below, if all sector transmission costs fall proportionately, the range of prices stays the same in each sector; the density of messages sent at any price simply rises proportionately (to the cost decrease) for all sectors.

• 22

  N can also be derived from summing up the expressions for market shares in (6).

• 23

  For example, it is maximal at symmetry (under the constraint that the sum of the inverse π_θs is constant).

• 24

  If all potential sectors are active, we get into a corner solution where the condition N > φ does not necessarily hold. If the model returns a solution with N < φ, it contradicts the congested formula used in setting up the choice probabilities. The existence of some latent sectors is enough to avoid that.

• 25

  If there are several sectors with the same profitability, then they are either all active or all inactive.

• 26

  From which we see that higher increases the likelihood that the expression is positive.

• 27

  This is reminiscent of Zahavi's law in transportation, according to which average travel times have remained constant over several decades, despite substantial increases in travel speed.

• 28

  We then need to verify that the condition N > φ is verified with sectors; this is duly met in the figures.

• 29

  Symmetric CES models are commonly deployed in the economics of product differentiation. Note here that the sector viability constraint, π > N/φ, is automatically satisfied.

• 30

  At the limit, monopoly prices, b, are set in each sector, returning π when the message is chosen. The probability of being chosen is , which therefore equals 1/π (see also (5)).

• 31

  Otherwise, the support of the price distribution will have a gap for prices such that profit is no lower at a lower price.

• 32

  It also depends on the rectangular demand assumption. Stegeman (1991) shows that there is insufficient advertising if demand slopes down, because firms do not internalize the consumer surplus of lower prices.

• 33

  Clearly the first-best optimum comprises one message per sector, and the active sectors should be the φ for which the profit per message, (b_θ−c_θ)q_θ−γ_θ, is highest. If γ is the same for all θ, these are the first φ ones, those for which π_θ is highest.

• 34

  When it comes later to including tax revenues, all we will need to assume is that they have some social value.

• 35

  Indeed, the first-best optimum entails just one message per sector, which also suggests more than proportional scaling back through taxes of low-cost sectors. Low-cost sectors are also the sectors with small tax raised per message; the high-cost sectors have the additional social benefit of larger tax revenue per message.

• 36

  The welfare function (31) is written in terms of real resource costs and benefits; implicitly, any tax raised from suppliers is being redistributed to consumers with unit marginal utility of money.

• 37

  The interpretation is that the business stealing and consumer surplus appropriation externalities net out.