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Competitive Targeted Advertising with Price Discrimination

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Abstract

This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market where the distribution of consumers' preferences is discrete and where advertising plays two major roles. It is used by firms as a way to transmit relevant information to otherwise uninformed consumers, and it is used as a price discrimination device. We compare the firms' optimal marketing mix (advertising and pricing) when they adopt mass advertising/non-discrimination strategies and targeted advertising/price discrimination strategies. If firms are able to adopt targeted advertising strategies, we find that the symmetric price equilibrium is in mixed strategies, while the advertising is chosen deterministically. Our results also unveil that as long as we allow for imperfect substitutability between the goods, ?rms do not necessarily target more ads to their own market. In particular, firms' optimal marketing mix leads to higher advertising reach in the rival's market than in the firms' own market, provided that advertising costs are sufficiently low in relation to the consumer's reservation value. The comparison of the optimal marketing-mix under mass advertising strategies and targeted advertising strategies reveals that targeted advertising might constitute a tool to dampen price competition. In particular, if advertising costs are sufficiently low in relation to the value of the goods, we obtain that average prices with non-discrimination (mass advertising) are below those with price discrimination and targeted advertising (regardless of the market segment). Accordingly, when (i) goods are imperfect substitutes, (ii) advertising is not too expensive, and (iii) targeted advertising constitutes an effective price discrimination tool, price discrimination through targeted advertising may be detrimental to social welfare since it boosts industry profits at the expense of consumer surplus.

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  • Rosa Branca Esteves & Joana Resende, 2011. "Competitive Targeted Advertising with Price Discrimination," NIPE Working Papers 08/2011, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:08/2011
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    Cited by:

    1. Karle, Heiko & Peitz, Martin, 2017. "De-targeting: Advertising an assortment of products to loss-averse consumers," European Economic Review, Elsevier, vol. 95(C), pages 103-124.
    2. Chongwoo Choe & Stephen King & Noriaki Matsushima, 2017. "Pricing with Cookies: Behavior-Based Price Discrimination and Spatial Competition," Monash Economics Working Papers 07-17, Monash University, Department of Economics.
    3. Andreas Hefti & Shuo Liu, 2016. "Targeted information and limited attention," ECON - Working Papers 230, Department of Economics - University of Zurich.
    4. Zhijun Chen & Chongwoo Choe & Noriaki Matsushima, 2018. "Competitive Personalized Pricing," ISER Discussion Paper 1023, Institute of Social and Economic Research, Osaka University.

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