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Competitive Targeted Advertising with Price Discrimination

This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market in which advertising plays two major roles. It transmits relevant information to otherwise uninformed consumers and it acts as a price discrimination device. We look at the firms' ’optimal advertising and pricing decisions in two settings, namely mass advertising/non-discrimination strategies and targeted advertising/price discrimination strategies. In the case of targeted advertising, we show that firms advertise more in its weak market than in its strong market. The analysis highlights that targeted advertising might constitute a tool to dampen price competition. We show that average prices with mass advertising/non-discrimination can be below those with targeted advertising/price discrimination (regardless of the market segment). We also fi nd that, when advertising costs are not too high, price discrimination by means of targeted advertising can boost industry pro fits at the expense of consumer and overall welfare. Finally, we show that overall welfare and consumer surplus falls when firms use targeted advertising instead of mass advertising.

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File URL: http://www3.eeg.uminho.pt/economia/nipe/docs/2013/NIPE_WP_07_2013.pdf
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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 07/2013.

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Date of creation: 2013
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Handle: RePEc:nip:nipewp:07/2013
Contact details of provider: Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
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  1. Gehrig, Thomas & Shy, Oz & Stenbacka, Rune, 2011. "History-based price discrimination and entry in markets with switching costs: A welfare analysis," European Economic Review, Elsevier, vol. 55(5), pages 732-739, June.
  2. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
  3. Ambarish Chandra, 2009. "TARGETED ADVERTISING: THE ROLE OF SUBSCRIBER CHARACTERISTICS IN MEDIA MARKETS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 58-84, 03.
  4. Thomas Gehrig & Oz Shy & Rune Stenbacka, 2012. "A Welfare Evaluation of History-Based Price Discrimination," Journal of Industry, Competition and Trade, Springer, vol. 12(4), pages 373-393, December.
  5. Yongmin Chen & Jason Pearcy, 2010. "Dynamic pricing: when to entice brand switching and when to reward consumer loyalty," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 674-685.
  6. Esteves, Rosa-Branca, 2010. "Pricing with customer recognition," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 669-681, November.
  7. 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.
  8. Galeotti, Andrea & Moraga-González, José Luis, 2008. "Segmentation, advertising and prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1106-1119, September.
  9. Esteves, Rosa-Branca, 2014. "Behavior-based price discrimination with retention offers," Information Economics and Policy, Elsevier, vol. 27(C), pages 39-51.
  10. Bester, H. & Petrakis, E., 1994. "Coupons and Oligopolistic Price Discrimination," Discussion Paper 1994-12, Tilburg University, Center for Economic Research.
  11. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
  12. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  13. Rosa Branca Esteves, 2007. "Customer Poaching and Advertising," NIPE Working Papers 12/2007, NIPE - Universidade do Minho.
  14. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
  15. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  16. Stahl II Dale O., 1994. "Oligopolistic Pricing and Advertising," Journal of Economic Theory, Elsevier, vol. 64(1), pages 162-177, October.
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