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De-targeting: Advertising an assortment of products to loss-averse consumers

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  • Karle, Heiko
  • Peitz, Martin

Abstract

We consider product markets in which single-product firms sell differentiated products to consumers through an intermediary. Consumers are interested only in a specific product category, but do not know before inspection which products belong to this category. An intermediary knows each consumer’s preferred product category and which products belong to it. It makes personalized product announcements to consumers. Such targeted advertising reduces overall advertising costs and, as a direct effect, maximizes industry profits. However, as we show in this paper, when consumers form reference prices and are loss averse, announcing additional products relaxes competition between firms. As a result, firms may earn higher profits from “de-targeting”; i.e., when the intermediary deliberately informs about some products and their price quotes from outside a consumer’s preferred product category.

Suggested Citation

  • Karle, Heiko & Peitz, Martin, 2017. "De-targeting: Advertising an assortment of products to loss-averse consumers," European Economic Review, Elsevier, vol. 95(C), pages 103-124.
  • Handle: RePEc:eee:eecrev:v:95:y:2017:i:c:p:103-124
    DOI: 10.1016/j.euroecorev.2017.03.011
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    Cited by:

    1. Benjamin Balzer & Antonio Rosato, 2018. "Expectations-Based Loss Aversion in Common-Value Auctions: Extensive vs. Intensive Risk," Working Paper Series 50, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    2. Rosato, Antonio, 2017. "Sequential negotiations with loss-averse buyers," European Economic Review, Elsevier, vol. 91(C), pages 290-304.

    More about this item

    Keywords

    Targeted advertising; Informative advertising; Consumer loss aversion; Reference prices; Contextual inference; Behavioral industrial organization;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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