IDEAS home Printed from https://ideas.repec.org/a/eee/gamebe/v92y2015icp53-73.html
   My bibliography  Save this article

Personalized pricing and advertising: An asymmetric equilibrium analysis

Author

Listed:
  • Anderson, Simon
  • Baik, Alicia
  • Larson, Nathan

Abstract

We study personalized price competition with costly advertising among n quality-cost differentiated firms. Strategies involve mixing over both prices and whether to advertise. In equilibrium, only the top two firms advertise, earning “Bertrand-like” profits. Welfare losses initially rise then fall with the ad cost, with losses due to excessive advertising and sales by the “wrong” firm. When firms are symmetric, the symmetric equilibrium yields perverse comparative statics and is unstable. Our key results apply when demand is elastic, when ad costs are heterogeneous, and with noise in consumer tastes.

Suggested Citation

  • Anderson, Simon & Baik, Alicia & Larson, Nathan, 2015. "Personalized pricing and advertising: An asymmetric equilibrium analysis," Games and Economic Behavior, Elsevier, vol. 92(C), pages 53-73.
    • Handle: RePEc:eee:gamebe:v:92:y:2015:i:c:p:53-73
    DOI: 10.1016/j.geb.2015.05.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0899825615000834
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.geb.2015.05.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Susan Athey & Glenn Ellison, 2011. "Position Auctions with Consumer Search," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(3), pages 1213-1270.
    2. Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-640, May.
    3. Palfrey, Thomas R. & Rosenthal, Howard, 1984. "Participation and the provision of discrete public goods: a strategic analysis," Journal of Public Economics, Elsevier, vol. 24(2), pages 171-193, July.
    4. Bester, Helmut & Petrakis, Emmanuel, 1995. "Price competition and advertising in oligopoly," European Economic Review, Elsevier, vol. 39(6), pages 1075-1088, June.
    5. Anderson, Simon P & de Palma, Andre, 2001. "Product Diversity in Asymmetric Oligopoly: Is the Quality of Consumer Goods Too Low?," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 113-135, June.
    6. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    7. Greg Shaffer & Z. John Zhang, 2002. "Competitive One-to-One Promotions," Management Science, INFORMS, vol. 48(9), pages 1143-1160, September.
    8. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 63-81.
    9. Dan Kovenock & Michael R. Baye & Casper G. de Vries, 1996. "The all-pay auction with complete information (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 291-305.
    10. Greg Shaffer & Z. John Zhang, 1995. "Competitive Coupon Targeting," Marketing Science, INFORMS, vol. 14(4), pages 395-416.
    11. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242.
    12. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, Decembrie.
    13. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 1-26.
    14. Simon P. Anderson & André de Palma, 2001. "Product Diversity in Asymmetric Oligopoly: Is the Quality of Consumer Goods too Low?," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 113-135, June.
    15. Arye L. Hillman & John G. Riley, 1989. "Politically Contestable Rents And Transfers," Economics and Politics, Wiley Blackwell, vol. 1(1), pages 17-39, March.
    16. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-449, October.
    17. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
    18. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, II: Applications," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 27-41.
    19. Kocas, Cenk & Kiyak, Tunga, 2006. "Addendum to "Theory and evidence on pricing by asymmetric oligopolies" [Int. J. Ind. Organ. 24 (2006) 83-105]," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 1077-1077, September.
    20. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
    21. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    22. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    23. Kocas, Cenk & Kiyak, Tunga, 2006. "Theory and evidence on pricing by asymmetric oligopolies," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 83-105, January.
    24. Shaffer, G. & Zhang, Z.J., 1994. "Competitive Coupon Targeting," Papers 94-02, Michigan - Center for Research on Economic & Social Theory.
    25. 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.
    26. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 465-491.
    27. Simon P. Anderson & André De Palma, 1988. "Spatial Price Discrimination with Heterogeneous Products," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 573-592.
    28. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-686, May.
    29. Sharkey, William W. & Sibley, David S., 1993. "A Bertrand model of pricing and entry," Economics Letters, Elsevier, vol. 41(2), pages 199-206.
    30. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
    31. Janssen, Maarten C.W. & Moraga-Gonzalez, Jose Luis & Wildenbeest, Matthijs R., 2005. "Truly costly sequential search and oligopolistic pricing," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 451-466, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Astorne-Figari, Carmen & López, José Joaquín & Yankelevich, Aleksandr, 2019. "Advertising for consideration," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 653-669.
    2. Simon P. Anderson & Bruno Jullien, 2015. "The advertising-financed business model in two-sided media markets," Post-Print hal-02866192, HAL.
    3. Didier Laussel & Ngo V. Long & Joana Resende, 2020. "The curse of knowledge: having access to customer information can reduce monopoly profits," RAND Journal of Economics, RAND Corporation, vol. 51(3), pages 650-675, September.
    4. David P. Myatt, 2019. "A Theory of Stable Price Dispersion," Economics Series Working Papers 873, University of Oxford, Department of Economics.
    5. Garella, Paolo G. & Laussel, Didier & Resende, Joana, 2021. "Behavior based price personalization under vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 76(C).
    6. Anderson, Simon & Baik, Alicia & Larson, Nathan, 2019. "Price Discrimination in the Information Age: Prices, Poaching, and Privacy with Personalized Targeted Discounts," CEPR Discussion Papers 13793, C.E.P.R. Discussion Papers.
    7. Montez, João & Marxen, Annabelle, 2020. "Licensing at the patent cliff and market entry," CEPR Discussion Papers 14276, C.E.P.R. Discussion Papers.
    8. Didier Laussel & Joana Resende, 2022. "When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model," Post-Print hal-03740642, HAL.
    9. Margarita De-Miguel-Guzmán & Carlos Ronquillo-Bolaños & Alexander Sánchez-Rodríguez & Gelmar García-Vidal & Reyner Pérez-Campdesuñer & Rodobaldo Martínez-Vivar, 2020. "Analysis of the Effectiveness of Advertising Messages. Comparison by Media, Typology, and Schedule of Advertisements," Tržište/Market, Faculty of Economics and Business, University of Zagreb, vol. 32(1), pages 27-46.
    10. David Bounie & Antoine Dubus & Patrick Waelbroeck, 2021. "Selling strategic information in digital competitive markets," RAND Journal of Economics, RAND Corporation, vol. 52(2), pages 283-313, June.
    11. Didier Laussel & Ngo Van Long & Joana Resende, 2023. "Profit Effects of Consumers’ Identity Management: A Dynamic Model," Management Science, INFORMS, vol. 69(6), pages 3602-3615, June.
    12. Joao Montez & Nicolas Schutz, 2021. "All-Pay Oligopolies: Price Competition with Unobservable Inventory Choices [Extremal Equilibria of Oligopolistic Supergames]," Review of Economic Studies, Oxford University Press, vol. 88(5), pages 2407-2438.
    13. Sandro Shelegia & Chris M. Wilson, 2021. "A Generalized Model of Advertised Sales," American Economic Journal: Microeconomics, American Economic Association, vol. 13(1), pages 195-223, February.
    14. Schlosser, Rainer, 2017. "Stochastic dynamic pricing and advertising in isoelastic oligopoly models," European Journal of Operational Research, Elsevier, vol. 259(3), pages 1144-1155.
    15. Esteves, Rosa-Branca & Resende, Joana, 2019. "Personalized pricing and advertising: Who are the winners?," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 239-282.
    16. Shelegia, Sandro & Wilson, Chris, 2016. "A Generalized Model of Sales," EconStor Preprints 147411, ZBW - Leibniz Information Centre for Economics.
    17. Laussel, Didier & Long, Ngo Van & Resende, Joana, 2019. "The Curse of Knowledge: Having Access to Customer Information Can be Detrimental to Monopoly’s Profit," Discussion paper series HIAS-E-93, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    18. Didier Laussel & Joana Resende, 2022. "When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model," Management Science, INFORMS, vol. 68(12), pages 8872-8888, December.
    19. Laussel, Didier & Long, Ngo Van & Resende, Joana, 2020. "Quality and price personalization under customer recognition: A dynamic monopoly model with contrasting equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    20. Schlosser, Rainer, 2016. "Joint stochastic dynamic pricing and advertising with time-dependent demand," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 439-452.
    21. Siemering, Christian, 2023. "A model of endogenous targeting in duopoly," Information Economics and Policy, Elsevier, vol. 64(C).
    22. Arnold, Michael & Zhang, Lan, 2020. "Competition with an information clearinghouse and asymmetric firms: Why more than two firms compete (or not) for shoppers," Games and Economic Behavior, Elsevier, vol. 122(C), pages 55-82.
    23. Chen, Bintong & Chen, Jing, 2017. "When to introduce an online channel, and offer money back guarantees and personalized pricing?," European Journal of Operational Research, Elsevier, vol. 257(2), pages 614-624.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Il-Horn Hann & Kai-Lung Hui & Sang-Yong Tom Lee & Ivan P.L. Png, 2005. "Sales and Promotions: A More General Model," Industrial Organization 0508014, University Library of Munich, Germany.
    2. David P. Myatt, 2019. "A Theory of Stable Price Dispersion," Economics Series Working Papers 873, University of Oxford, Department of Economics.
    3. Chioveanu, Ioana, 2008. "Advertising, brand loyalty and pricing," Games and Economic Behavior, Elsevier, vol. 64(1), pages 68-80, September.
    4. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, January.
    5. Ganesh Iyer & David Soberman & J. Miguel Villas-Boas, 2005. "The Targeting of Advertising," Marketing Science, INFORMS, vol. 24(3), pages 461-476, May.
    6. Thomas A. Weber & Zhiqiang (Eric) Zheng, 2007. "A Model of Search Intermediaries and Paid Referrals," Information Systems Research, INFORMS, vol. 18(4), pages 414-436, December.
    7. Surendra Rajiv & Shantanu Dutta & Sanjay K. Dhar, 2002. "Asymmetric Store Positioning and Promotional Advertising Strategies: Theory and Evidence," Marketing Science, INFORMS, vol. 21(1), pages 74-96, October.
    8. Anderson, Simon & Baik, Alicia & Larson, Nathan, 2019. "Price Discrimination in the Information Age: Prices, Poaching, and Privacy with Personalized Targeted Discounts," CEPR Discussion Papers 13793, C.E.P.R. Discussion Papers.
    9. 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.
    10. Mark Armstrong & John Vickers, 2018. "Patterns of Competition with Captive Customers," Economics Series Working Papers 864, University of Oxford, Department of Economics.
    11. Dirk Bergemann & Benjamin Brooks & Stephen Morris, 2021. "Search, Information, and Prices," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2275-2319.
    12. Wilson, Chris M., 2010. "Ordered search and equilibrium obfuscation," International Journal of Industrial Organization, Elsevier, vol. 28(5), pages 496-506, September.
    13. Astorne-Figari, Carmen & López, José Joaquín & Yankelevich, Aleksandr, 2019. "Advertising for consideration," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 653-669.
    14. Simon P. Anderson & Régis Renault, 2006. "Advertising Content," American Economic Review, American Economic Association, vol. 96(1), pages 93-113, March.
    15. Haan, Marco A. & Heijnen, Pim & Obradovits, Martin, 2023. "Competition with list prices," Games and Economic Behavior, Elsevier, vol. 140(C), pages 502-528.
    16. Soberman, David A. & Xiang, Yi, 2022. "Designing the content of advertising in a differentiated market," International Journal of Research in Marketing, Elsevier, vol. 39(1), pages 190-211.
    17. Lola Esteban & José Hernández, 2014. "Endogenous direct advertising and price competition," Journal of Economics, Springer, vol. 112(3), pages 225-251, July.
    18. Mark Armstrong & John Vickers, 2022. "Patterns of Competitive Interaction," Econometrica, Econometric Society, vol. 90(1), pages 153-191, January.
    19. Christou, C. & Vettas, N., 2008. "On informative advertising and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 92-112, January.
    20. Armstrong, Mark & Vickers, John, 2020. "Patterns of Price Competition and the Structure of Consumer Choice," MPRA Paper 98346, University Library of Munich, Germany.

    More about this item

    Keywords

    Consumer targeting; Price dispersion; Mixed strategy equilibrium; Bertrand equilibrium; Price advertising;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:gamebe:v:92:y:2015:i:c:p:53-73. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.