Marginal Revolution: Underappreciated economists, a continuing series: Jesse Shapiro. Yes, he is a mere Youngling, having just finished his Ph.D. at Harvard (he was a Shleifer student, and now visiting at Chicago). But he is likely to be one of the leading economists of the next generation. He studies why and how large numbers of people can make, or appear to make, systematic errors. This is perhaps the frontier question in contemporary economics. Here is the abstract from Jesse's paper on advertising:
I present a model of advertising in the presence of bounded memory and limited recall. In the model, consumers' memories record the quality of their experiences with a product. Exposure to advertising leads to memories of good experiences. Crucially, I assume that consumers cannot recall whether a memory orginates from a genuine consumption experience or from exposure to advertising. The model yields several novel implications. First, advertisers will concentrate their efforts on past customers, because experienced consumers will be more likely to trust that their positive feelings toward the brand are genuine. The model may therefore help to explain why established, familiar brands continue to advertise extensively. Second, the firm's desire to "saturate" the consumer with positive memories can lead to the commonly observed phenomenon of "pulsing," in which a firm oscillates between no advertising and some positive amount. Third, exaggeration is limited, in the sense that advertisers may not cause consumers to remember haivng extraordinary experiences with the brand. Indeed, under some conditions an equilibrium in which advertising conveys the best possible impression of the brand can exist only when the total amount of advertising is small.