Competitive Targeted Advertising with Price Discrimination

Abstract

This paper examines how should …rms allocate their advertising budgets between consumers who have a high preference for their products (strong segment) and those who prefer competing products (weak segment). Targeted advertising transmits relevant information to otherwise uninformed consumers and it is used as a price discrimination device. With targeted advertising and price discrimination, we …nd that, when the attractiveness of the weak segment is low, each …rm advertises more intensively in its strong segment than in its weak segment. The same result arises when the attractiveness of the weak segment is high and advertising is expensive enough. Interestingly, when the attractiveness of the weak segment is high but advertising costs are su¢ ciently low, it is optimal for each …rm to advertise more intensively in its weak segment than in its strong segment. The paper also investigates how advertising strategies and equilibrium pro…ts are a¤ected by price discrimination.

Pricing with Cookies: Behavior-Based Price Discrimination and Spatial Competition

“…For example, Safeway's Just for U program uses complex algorithms to process customers' purchase data, based on which the retailer can send personalized offers on-line or through mobile apps ('Supermarkets offer personalized pricing', Bloomberg Business, November 16, 2013). As mobile technologies advance rapidly, this type of personalization becomes more prevalent and even real-time personalized offers may become eventually possible (Esteves and Resende, 2016). These are more effective than traditional paper coupons in making direct price comparison harder, which can render personalized pricing feasible.…”

Targeted Information and Limited Attention

“…The only type of equilibrium that can occur is non-intrusive (hence also non-overlapping), and the sets of targeted consumers (essentially) coincide with the respective prime segments. 13 Such a segmenting nature of equilibrium targeting strategies with differentiated products and fully attentive consumers has been found, e.g., by Iyer et al (2005), Esteban and Hernandez (2007), Brahim et al (2011) and Esteves and Resende (2016). 14 The picture changes substantially if the degree of inattentiveness in the market increases.…”

Targeted Advertising and Consumer Information

“…First and foremost, this paper is part of the literature on targeted advertising (Athey and Gans, 2010;Bergemann and Bonatti, 2011;Brahim et al, 2011;Esteban et al, 2001;Esteves and Resende, 2016) and in particular that which is concerned with exogeneously informed consumers (Meurer and Stahl, 1994;Xu et al, 2012). 5 Typically, this literature finds that in the absence of competitive constraints, targeting is a way for firms to reach consumers with a high valuation and therefore to increase their market power.…”