Competitive Targeted Advertising with Price Discrimination

Rosa Esteves () and Joana Resende

No 07/2013, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market in which advertising plays two major roles. It transmits relevant information to otherwise uninformed consumers and it acts as a price discrimination device. We look at the firms' optimal advertising and pricing decisions in two settings, namely mass advertising/non-discrimination strategies and targeted advertising/price discrimination strategies. In the case of targeted advertising, we show that firms advertise more in its weak market than in its strong market. The analysis highlights that targeted advertising might constitute a tool to dampen price competition. We show that average prices with mass advertising/non-discrimination can be below those with targeted advertising/price discrimination (regardless of the market segment). We also fi nd that, when advertising costs are not too high, price discrimination by means of targeted advertising can boost industry pro fits at the expense of consumer and overall welfare. Finally, we show that overall welfare and consumer surplus falls when firms use targeted advertising instead of mass advertising.

Date: 2013
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-mkt
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Related works:
Journal Article: Competitive Targeted Advertising with Price Discrimination (2016)
Working Paper: Competitive Targeted Advertising with Price Discrimination (2011)
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