Customer Poaching and Advertising

This article is a first loock at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm can recognize customers with different past purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm that advertises the highest price in the first period will engage in price discrimination, and that poaching clearly benefits the discriminating firm. This gives rise to "the race for discrimination effect", through which price discrimination may act to soften price competition rather than to intensify it. As a result of that, all firms might become better off, even when only one of them can engage in price discrimination. This article offers a first attempt to evaluate the effects of price discrimination on the efficiency properties of advertising. In markets with low or no advertising costs, allowing frims to price discriminate leads them to provide too little advertising, which is not good for consumers and overall welfare. Only in markets with high advertising costs, may firms overadvertise. Regarding the welfare effects, price dsscrimination is generally bad for welfare and consumer surplus, though good for firms.