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Customer Directed Advertising and Product Quality

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  • Lola Esteban
  • Jose M. Hernandez

    (Universidad de Zaragoza)

  • Jose Luis Moraga-Gonzalez

    ()
    (Groningen University)

Abstract

This paper studies the relationship between three key elements of the marketing mix, namely, price, product, and promotion, in a model where a seller employs informative advertising to launch a new product. We propose a fairly general advertising technology for the study of three promotional strategies—mass, imperfectly targeted, and customer directed advertising (CDA). We find that both the private and the social incentives to use distinct advertising strategies are aligned, and that sales are likely to be promoted through CDA. Compared to mass advertising, with CDA the social planner reduces quantity and downgrades quality whereas the seller sometimes upgrades it. Our model of targeting with endogenous product quality provides some new insights into the way the transition from mass to specialized advertising can affect market outcomes. Quality distortions imply that (i) even if CDA increases the market price, the degree of market power need not increase and (ii) CDA may yield a welfare loss even if it leads to a lower market price. This discussion paper has resulted in a publication in the Journal of Economics and Management Strategy , 2006, 15(4), 943-68.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-099/1.

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Date of creation: 16 Oct 2001
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Handle: RePEc:dgr:uvatin:20010099

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Web page: http://www.tinbergen.nl

Related research

Keywords: customer directed advertising; mass advertising; monopoly; quality; targeted advertising;

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Cited by:
  1. Nick Vikander, 2011. "Targeted Advertising and Social Status," Tinbergen Institute Discussion Papers 11-016/1, Tinbergen Institute.
  2. Immordino Giovanni, 2009. "Advertising and Cost Reduction," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-15, April.
  3. Lola Esteban & José Hernández, 2012. "Specialized advertising media and product market competition," Journal of Economics, Springer, vol. 106(1), pages 45-74, May.
  4. Galeotti, Andrea & Moraga-González, José Luis, 2008. "Segmentation, advertising and prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1106-1119, September.
  5. 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.
  6. Lola Esteban & Jose M. Hernandez, 2007. "Strategic Targeted Advertising and Market Fragmentation," Economics Bulletin, AccessEcon, vol. 12(10), pages 1-12.
  7. Lola Esteban & Agustín Gil & José Hernández, 2004. "Pricing with Endogenous Direct Advertising in a Monopoly," Review of Industrial Organization, Springer, vol. 25(2), pages 129-154, 06.
  8. Lola Esteban & José Hernández, 2014. "Endogenous direct advertising and price competition," Journal of Economics, Springer, vol. 112(3), pages 225-251, July.

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