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Targeted Advertising and Costly Consumer Search

Roberto Burguet and Vaiva Petrikaite

No 971, Working Papers from Barcelona Graduate School of Economics

Abstract: We study a model of advertising targeting based on information about the consumer’s likely ranking of products. With horizontally differentiated goods and costly search, ads then convey to consumers a noisy, positive signal of their unknown willingness to pay for the firms’ products. That implies a higher expected willingness to pay for a yet not sampled firm, which increases the incentives to search, but also a lower expected differentiation of the products that the consumers learn about, which reduces the incentives to search. The first effect is more important for lower search costs, and the second for larger number of products. Also, the equilibrium intensity of advertising will affect the precision of consumers’ information. Larger marginal cost of advertising results in larger endogenous segmentation and larger prices.

Keywords: random advertising; targeted advertising; horizontal differentiation; sequential search (search for similar items in EconPapers)
JEL-codes: L13 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-mkt
Date: 2017-06
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