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Customer Poaching and Advertising

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Author Info
Rosa Branca Esteves () (Universidade do Minho - NIPE)

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Abstract

This article is a first loock at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm can recognize customers with different past purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm that advertises the highest price in the first period will engage in price discrimination, and that poaching clearly benefits the discriminating firm. This gives rise to "the race for discrimination effect", through which price discrimination may act to soften price competition rather than to intensify it. As a result of that, all firms might become better off, even when only one of them can engage in price discrimination. This article offers a first attempt to evaluate the effects of price discrimination on the efficiency properties of advertising. In markets with low or no advertising costs, allowing frims to price discriminate leads them to provide too little advertising, which is not good for consumers and overall welfare. Only in markets with high advertising costs, may firms overadvertise. Regarding the welfare effects, price dsscrimination is generally bad for welfare and consumer surplus, though good for firms.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 12/2007.

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Date of creation: 2007
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Handle: RePEc:nip:nipewp:12/2007

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Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kyle Bagwell, 2005. "The Economic Analysis of Advertising," Discussion Papers 0506-01, Columbia University, Department of Economics. [Downloadable!]
    Other versions:
  2. Ireland, Norman J, 1993. "The Provision of Information in a Bertrand Oligopoly," Journal of Industrial Economics, Blackwell Publishing, vol. 41(1), pages 61-76, March. [Downloadable!] (restricted)
  3. Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 63-81, January. [Downloadable!] (restricted)
  4. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
    Other versions:
  5. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer. [Downloadable!] (restricted)
  6. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June. [Downloadable!] (restricted)
  7. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September. [Downloadable!] (restricted)
  8. Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March. [Downloadable!] (restricted)
  9. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
  10. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 6(4), pages 877-897, December. [Downloadable!] (restricted)
  11. Esteban, Lola & Gil, Agustin & Hernandez, Jose M, 2001. "Informative Advertising and Optimal Targeting in a Monopoly," Journal of Industrial Economics, Blackwell Publishing, vol. 49(2), pages 161-80, June. [Downloadable!] (restricted)
  12. Michael Smith & Erik Brynjolfsson, 1999. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Computing in Economics and Finance 1999 1022, Society for Computational Economics.
  13. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October. [Downloadable!] (restricted)
  14. Thisse, Jacques-Francois & Vives, Xavier, 1988. "On the Strategic Choice of Spatial Price Policy," American Economic Review, American Economic Association, vol. 78(1), pages 122-37, March. [Downloadable!] (restricted)
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  15. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October. [Downloadable!] (restricted)
  16. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter. [Downloadable!] (restricted)
  17. Taylor, Curtis R, 2003. " Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 223-46, Summer.
    Other versions:
  18. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 465-91, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rosa Branca Esteves, 2009. "A Survey on the Economics of Behaviour-Based Price Discrimination," NIPE Working Papers 5/2009, NIPE - Universidade do Minho. [Downloadable!]
  2. Rosa Branca Esteves & Hélder Vasconcelos, 2009. "Price Discrimination under Customer Recognition and Mergers," NIPE Working Papers 23/2009, NIPE - Universidade do Minho. [Downloadable!]
  3. Rosa Branca Esteves, 2007. "Pricing with Customer Recognition," NIPE Working Papers 27/2007, NIPE - Universidade do Minho. [Downloadable!]
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This page was last updated on 2009-11-21.

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