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Personalized Pricing and Advertising: An Asymmetric Equilibrium Analysis

Simon Anderson (), Alicia Baik and Nathan Larson

No 10464, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study personalized price competition with costly advertising among n quality-cost differentiated firms. Strategies involve mixing over both prices and whether to advertise. In equilibrium, only the top two firms advertise, earning “Bertrand-like" profits. Welfare losses initially rise then fall with the ad cost, with losses due to excessive advertising and sales by the “wrong " firm. When firms are symmetric, the symmetric equilibrium yields perverse comparative statics and is unstable. Our key results apply when demand is elastic, when ad costs are heterogeneous, and with noise in consumer tastes.

Keywords: Bertrand equilibrium; consumer targeting; mixed strategy equilibrium; price advertising; price dispersion (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2015-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-ind, nep-mfd, nep-mic and nep-mkt
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