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Endogenous direct advertising and price competition

Listed author(s):
  • Lola Esteban
  • José Hernández

    ()

Registered author(s):

    This paper analyzes how the use of endogenous direct advertising affects the functioning of a horizontally-differentiated market. We formulate a two-stage game of pricing and informative advertising in which two firms, first, compete with mass advertising and, later, build a database using their historical sales records and compete by directly targeting the ads on their potential customers. We show that, compared to the case where firms only use mass advertising, direct advertising yields higher advertising efforts and an intertemporal reallocation of both market power and profits from the first to the second period. We also find that targeting increases the overall firms’ profit and the level of social welfare, but the impact on the average intertemporal price and consumer surplus is ambiguous. Finally, when reaching the potential market with mass advertising is sufficiently expensive, the use of direct advertising leads firms to provide the socially optimal level of advertising whereas, if mass advertising is cheap, firms tend to launch too little advertising in the first period and too much in the second. Copyright Springer-Verlag Wien 2014

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    File URL: http://hdl.handle.net/10.1007/s00712-013-0357-1
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    Article provided by Springer in its journal Journal of Economics.

    Volume (Year): 112 (2014)
    Issue (Month): 3 (July)
    Pages: 225-251

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    Handle: RePEc:kap:jeczfn:v:112:y:2014:i:3:p:225-251
    DOI: 10.1007/s00712-013-0357-1
    Contact details of provider: Web page: http://www.springer.com

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    1. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
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    15. Rosa Branca Esteves, 2007. "Customer Poaching and Advertising," NIPE Working Papers 12/2007, NIPE - Universidade do Minho.
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