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Customer Directed Advertising and Product Quality

Author

Listed:
  • Lola Esteban
  • José M. Hernández
  • José Luis Moraga-González

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." Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.

Suggested Citation

  • Lola Esteban & José M. Hernández & José Luis Moraga-González, 2006. "Customer Directed Advertising and Product Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 943-968, December.
  • Handle: RePEc:bla:jemstr:v:15:y:2006:i:4:p:943-968
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    Citations

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    Cited by:

    1. Galeotti, Andrea & Moraga-González, José Luis, 2008. "Segmentation, advertising and prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1106-1119, September.
    2. Nick Vikander, 2011. "Targeted Advertising and Social Status," Tinbergen Institute Discussion Papers 11-016/1, Tinbergen Institute.
    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. Lola Esteban & Jose M. Hernandez, 2007. "Strategic Targeted Advertising and Market Fragmentation," Economics Bulletin, AccessEcon, vol. 12(10), pages 1-12.
    5. Immordino Giovanni, 2009. "Advertising and Cost Reduction," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-15, April.
    6. Lola Esteban & José Hernández, 2014. "Endogenous direct advertising and price competition," Journal of Economics, Springer, vol. 112(3), pages 225-251, July.
    7. Lola Esteban & José Hernández, 2011. "Specialized advertising and price competition in vertically differentiated markets," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 2(2), pages 255-282, June.

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