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CUSTOMER POACHING AND ADVERTISING -super-

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  • ROSA BRANCA ESTEVES

Abstract

This paper is a first look at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm which advertises the highest price in the first period will engage in price discrimination, a practice that clearly benefits the discriminating firm. This poaching gives rise to 'the race for discrimination effect,' through which price discrimination may act actually to soften price competition rather than intensify it. As a result, all firms may become better off, even when only one of them can engage in price discrimination. This paper 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 firms 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, might firms overadvertise. Regarding the welfare effects, price discrimination is generally bad for welfare and consumer surplus, though good for firms. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.

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  • Rosa Branca Esteves, 2009. "CUSTOMER POACHING AND ADVERTISING -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 112-146, March.
  • Handle: RePEc:bla:jindec:v:57:y:2009:i:1:p:112-146
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    Cited by:

    1. Bernard Caillaud & Romain De Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," PSE Working Papers halshs-00622291, HAL.
    2. Zhang, Jianqiang & Liang, Qi & Huang, Jian, 2016. "Forward advertising: A competitive analysis of new product preannouncement," Information Economics and Policy, Elsevier, vol. 37(C), pages 3-12.
    3. Esteves, Rosa-Branca, 2014. "Behavior-based price discrimination with retention offers," Information Economics and Policy, Elsevier, vol. 27(C), pages 39-51.
    4. Andreia Amorim & Rosa-Branca Esteves, 2016. "Retention Strategies in a Switching Cost Model," NIPE Working Papers 10/2016, NIPE - Universidade do Minho.
    5. De Nijs, Romain, 2017. "Behavior-based price discrimination and customer information sharing," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 319-334.
    6. repec:kap:jeczfn:v:122:y:2017:i:1:d:10.1007_s00712-017-0526-8 is not listed on IDEAS
    7. Simshauser, Paul & Whish-Wilson, Patrick, 2017. "Price discrimination in Australia's retail electricity markets: An analysis of Victoria & Southeast Queensland," Energy Economics, Elsevier, vol. 62(C), pages 92-103.
    8. repec:eee:iepoli:v:40:y:2017:i:c:p:60-70 is not listed on IDEAS

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