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Targeted advertising with vertically differentiated products

Lola Esteban and José María Hernández ()
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Lola Esteban: Department of Economic Analysis. Factulad de Ciencias Económicas y Empresariales. Universidad de Zaragoza.
José María Hernández: Department of Economic Analysis. Factulad de Ciencias Económicas y Empresariales. Universidad de Zaragoza.

Documentos de Trabajo from Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza

Abstract: This paper presents an incomplete information game of pricing and targeted advertising with vertically differentiated product. Firms have incomplete information about production costs and can inform consumers about price and product characteristics by either using the mass media, which reaches the whole market, or the specialized media, which reaches only the most eager consumers. In this framework, we show that pure strategy Bayesian Nash equilibria exist, and that, as compared to mass advertising, targeting leads to higher prices. Further, we offer an explanation for permanent market fragmentation, which is related to high production costs, and prove that the probability of such fragmentation is directly related to the degree of precision of the targeting technology. Finally, we show that targeting can only occasionally reduce welfare.

Keywords: Informative advertising; targeting; vertical differentiation; Bayesian games; price discrimination. (search for similar items in EconPapers)
JEL-codes: D43 D82 (search for similar items in EconPapers)
Date: 2004-07
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Persistent link: http://EconPapers.repec.org/RePEc:zar:wpaper:dt2004-07

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