Targeted advertising by asymmetric firms

In competitive businesses, weak firms that incur high costs may have an “advantage of the weak” when competing against strong firms that spend low costs. They could deploy strategies that are not so appealing to strong firms, thereby getting benefits from competition. This paper investigates whether this “advantage of the weak” works in the advertising market. We develop a duopoly model where two firms compete on informative advertising. While endowed with asymmetric costs, the two firms endogenously choose between mass advertising and targeted advertising. Using a game theoretic method, we find that targeted advertising implies less wastage, more flexible decision, and less fierce competition. However, targeted advertising indirectly closes the gap between the costs of the two firms. As a result, targeted advertising may benefit the high-cost firm at the expense of the low-cost firm. We also analyze the case of imperfect targeting and predict that imperfection of targeted advertising tends to restore the low-cost firm’s cost advantage, thereby making the low-cost firm better off. By extending the model to incorporate targeted pricing and various cost functions, we check the robustness of the model and get more insights about asymmetric competition on targeted advertising. Overall, this paper claims that new technologies on targeting provide the less efficient firm opportunities to catch up with its competitor.