Title: Consumer Attention Allocation and Firm Strategies
Description: Nowadays consumers can easily access to vast amounts of product information before making a purchase. Yet, limitations on the ability to process information force consumers to make choices regarding the subjects to which they pay more or less attention. In this dissertation, I study how a consumer optimally allocates attention to various product information before making a purchase decision and how a seller should design the marketing strategies taking into account the consumer's attention allocation decision. I find that either a consumer engages in “confirmatory” search under which she searches more information that favors her prior belief or the consumer engages in “disconfirmatory” search under which she searches more information that disfavors her prior belief. In particular, the consumer conducts more disconfirmatory search when the information processing cost is low, while she conducts more confirmatory search when the cost is high. This suggests that “confirmatory bias” widely studied in psychology literature could be optimal behavior coming out of people optimizing attention to different types of information, especially when people has high information processing costs.

Furthermore, a consumer's purchase likelihood may vary with her information processing cost in a non-monotonic way, depending on the consumer's prior belief and the utilities of buying a matched product and a mismatched product. Moreover, I show that when more information becomes available or credible, the consumer would increase attention to negative information when the prior utility of the product is high but she would increase attention to positive information when the prior utility is low. In terms of seller's strategies, I find that when the consumer has a low information processing cost, the seller would charge a relatively high price such that consumers always process information; but when the consumer has a high information processing cost, the seller would charge a relatively low price such that consumers purchase the product without any learning. The optimal price and profit would first decrease and then increase in consumer's information processing cost. In addition, offering the return policy induces the consumer to pay more attention to positive information and less attention to negative information, and the seller would offer the return policy except when the consumer has a very high information processing cost.

Finally, when a seller can influence the information environment, he would have a lower incentive to suppress the negative information when the consumer has a lower prior belief about product fit. Moreover, a higher information processing cost for a consumer would increase or decrease a seller's incentive to suppress the negative information in the environment, depending on whether the seller can adjust the product price and whether the consumer has a high or low prior belief. Interestingly, the seller may charge a lower price when he can fully control the information environment than when he can not.