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Pricing with Endogenous Direct Advertising in a Monopoly

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Author Info

  • Lola Esteban

    ()

  • Agustín Gil

    ()

  • José Hernández

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    Abstract

    This paper develops a model of informative advertising in which a firm builds a database using its historical sales records in order to directly target ads on those consumers who have a high probability of purchasing its products. We show that the firm can use this type of direct advertising as a screening mechanism to identify high demand consumers. As a result, direct advertising can work essentially as a device to increase a firm’s monopoly power. From a social point of view, this implies that the transition from traditional mass-advertising to direct advertising can generate a trade-off between higher advertising efficiency and greater monopoly power. We compute the model to shed light on the relative strength of these two forces, and find that while direct advertising might have a substantial negative impact on consumers, this advertising technology can only occasionally reduce welfare. Copyright Kluwer Academic Publishers 2004

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    File URL: http://hdl.handle.net/10.1007/s11151-004-1094-y
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    Bibliographic Info

    Article provided by Springer in its journal Review of Industrial Organization.

    Volume (Year): 25 (2004)
    Issue (Month): 2 (06)
    Pages: 129-154

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    Handle: RePEc:kap:revind:v:25:y:2004:i:2:p:129-154

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    Web page: http://www.springerlink.com/link.asp?id=100336

    Related research

    Keywords: Direct advertising; informative advertising; monopoly; price discrimination;

    References

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    1. Schmalensee, Richard, 1978. "A Model of Advertising and Product Quality," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 485-503, June.
    2. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
    3. Lola Esteban & Jose M. Hernandez & Jose Luis Moraga-Gonzalez, 2001. "Customer Directed Advertising and Product Quality," Tinbergen Institute Discussion Papers 01-099/1, Tinbergen Institute.
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    Cited by:
    1. Lola Esteban & José Hernández, 2011. "Specialized advertising and price competition in vertically differentiated markets," SERIEs, Spanish Economic Association, vol. 2(2), pages 255-282, June.

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