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Is targeted advertising always beneficial?


  • 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.

Suggested Citation

  • Ben Elhadj-Ben Brahim, Nada & Lahmandi-Ayed, Rim & Laussel, Didier, 2011. "Is targeted advertising always beneficial?," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 678-689.
  • Handle: RePEc:eee:indorg:v:29:y:2011:i:6:p:678-689 DOI: 10.1016/j.ijindorg.2011.03.002

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    References listed on IDEAS

    1. Bester, Helmut & Petrakis, Emmanuel, 1995. "Price competition and advertising in oligopoly," European Economic Review, Elsevier, vol. 39(6), pages 1075-1088, June.
    2. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 63-81.
    3. Ganesh Iyer & David Soberman & J. Miguel Villas-Boas, 2005. "The Targeting of Advertising," Marketing Science, INFORMS, vol. 24(3), pages 461-476, May.
    4. Hernandez-Garcia, Jose M., 1997. "Informative advertising, imperfect targeting and welfare," Economics Letters, Elsevier, vol. 55(1), pages 131-137, August.
    5. Roy, Santanu, 2000. "Strategic segmentation of a market," International Journal of Industrial Organization, Elsevier, vol. 18(8), pages 1279-1290, December.
    6. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
    7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, July.
    8. repec:ebl:ecbull:v:12:y:2007:i:10:p:1-12 is not listed on IDEAS
    9. Andrea Galeotti & Jose Luis Moraga, 2003. "Strategic Targeted Advertising," Tinbergen Institute Discussion Papers 03-035/1, Tinbergen Institute.
    10. 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.
    11. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
    12. 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.
    13. Lola Esteban & Jose M. Hernandez, 2007. "Strategic Targeted Advertising and Market Fragmentation," Economics Bulletin, AccessEcon, vol. 12(10), pages 1-12.
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    Cited by:

    1. Jianqiang Zhang & Weijun Zhong & Shue Mei, 2012. "Competitive effects of informative advertising in distribution channels," Marketing Letters, Springer, vol. 23(3), pages 561-584, September.
    2. Rosa Branca Esteves & Joana Resende, 2011. "Competitive Targeted Advertising with Price Discrimination," NIPE Working Papers 08/2011, NIPE - Universidade do Minho.
    3. Roberto Burguet & Vaiva Petrikaite, 2017. "Targeted Advertising and Costly Consumer Search," Working Papers 971, Barcelona Graduate School of Economics.
    4. Andreas Hefti & Shuo Liu, 2016. "Targeted information and limited attention," ECON - Working Papers 230, Department of Economics - University of Zurich.
    5. Stühmeier, Torben, 2012. "Target Advertising and Market Transparency," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62021, Verein für Socialpolitik / German Economic Association.

    More about this item


    Targeted and random advertising; Advertising cost; Spatial differentiation;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising


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