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Personalized pricing and advertising: Who are the winners?

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  • Esteves, Rosa-Branca
  • Resende, Joana

Abstract

This paper investigates who wins and who loses when firms depart from a mass advertising/uniform pricing strategy (benchmark model) to a targeted advertising/price discrimination one. Considering a duopoly market in which firms simultaneously compete in prices and advertising decisions, we examine the competitive and welfare effects of personalized pricing with targeted advertising by comparing equilibrium outcomes under customized advertising/ pricing decisions to the results arising under mass advertising and uniform pricing. We show that, when both firms compete in both market segments, all segment consumers are expected to pay higher average prices under the personalized advertising/pricing strategy. We also show that, in the context of our simultaneous game, targeted advertising with price discrimination might boost firms’ profits in comparison to the case of mass advertising and uniform prices. The overall welfare effects of the personalized strategy are ambiguous. However, even when the personalized strategy boosts overall welfare, consumers might all be worse-off. Thus the paper gives support to concerns that have been raised regarding the firms’ ability to adopt personalized strategies to boost profits at the expense of consumers.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:indorg:v:63:y:2019:i:c:p:239-282
    DOI: 10.1016/j.ijindorg.2018.11.003
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    Cited by:

    1. 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.
    2. Rosa-Branca Esteves, 2021. "Can personalized pricing be a winning strategy in oligopolistic markets with heterogeneous demand customers? Yes, it can," NIPE Working Papers 08/2021, NIPE - Universidade do Minho.
    3. Jean-Pierre I. Rest & Alan M. Sears & Li Miao & Lorna Wang, 2020. "A note on the future of personalized pricing: cause for concern," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 19(2), pages 113-118, April.
    4. Charlson, G., 2021. "Third-Degree Price Discrimination in the Age of Big Data," Cambridge Working Papers in Economics 2159, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    Competitive price discrimination; Customer recognition; Advertising strategies; Digital markets; Welfare; Competition policy;
    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
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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