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Endogenous direct advertising and price competition

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  • Lola Esteban
  • José Hernández

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Abstract

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

Suggested Citation

  • Lola Esteban & José Hernández, 2014. "Endogenous direct advertising and price competition," Journal of Economics, Springer, vol. 112(3), pages 225-251, July.
  • Handle: RePEc:kap:jeczfn:v:112:y:2014:i:3:p:225-251
    DOI: 10.1007/s00712-013-0357-1
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    References listed on IDEAS

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    6. Lola Esteban & José Hernández, 2011. "Specialized advertising and price competition in vertically differentiated markets," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 2(2), pages 255-282, June.
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    Cited by:

    1. repec:kap:jeczfn:v:122:y:2017:i:1:d:10.1007_s00712-017-0526-8 is not listed on IDEAS
    2. repec:eee:iepoli:v:39:y:2017:i:c:p:15-25 is not listed on IDEAS

    More about this item

    Keywords

    Informative advertising; Targeting; Price dispersion; D43; L13; M37;

    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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