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Is targeted advertising always beneficial?

Listed author(s):
  • Ben Elhadj-Ben Brahim, Nada
  • Lahmandi-Ayed, Rim
  • Laussel, Didier

In this paper, we study a simple model in which two horizontally differentiated firms compete in prices and targeted advertising on an initially uninformed market. First, the Nash equilibrium is fully characterized. We prove that when the advertising cost is low, firms target only their “natural markets”, while they cross-advertise when this cost is high. Second, the outcome at equilibrium is compared with random advertising. Surprisingly, we prove that firms' equilibrium profits may be lower with targeted advertising relative to random advertising, while firms are given more options with targeted advertising.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167718711000270
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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 6 ()
Pages: 678-689

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Handle: RePEc:eee:indorg:v:29:y:2011:i:6:p:678-689
DOI: 10.1016/j.ijindorg.2011.03.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. Bester, Helmut & Petrakis, Emmanuel, 1995. "Price competition and advertising in oligopoly," European Economic Review, Elsevier, vol. 39(6), pages 1075-1088, June.
  2. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
  3. Roy, Santanu, 2000. "Strategic segmentation of a market," International Journal of Industrial Organization, Elsevier, vol. 18(8), pages 1279-1290, December.
  4. Esteban, Lola & Gil, Agustin & Hernandez, Jose M, 2001. "Informative Advertising and Optimal Targeting in a Monopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 161-180, June.
  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. Andrea Galeotti & Jose Luis Moraga, 2003. "Strategic Targeted Advertising," Tinbergen Institute Discussion Papers 03-035/1, Tinbergen Institute.
  7. Hamilton, Stephen F., 2004. "Informative Advertising in Concentrated, Differentiated Markets," Working Papers 201546, University of Wisconsin-Madison, Department of Agricultural and Applied Economics, Food System Research Group.
  8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, September.
  9. Lola Esteban & Jose M. Hernandez, 2007. "Strategic Targeted Advertising and Market Fragmentation," Economics Bulletin, AccessEcon, vol. 12(10), pages 1-12.
  10. Hernandez-Garcia, Jose M., 1997. "Informative advertising, imperfect targeting and welfare," Economics Letters, Elsevier, vol. 55(1), pages 131-137, August.
  11. repec:ebl:ecbull:v:12:y:2007:i:10:p:1-12 is not listed on IDEAS
  12. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
  13. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 63-81.
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