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Purchase-Based Targeted Advertising: A Competitive Analysis
Abstract
Purchase-Based Targeted Advertising (PBTA) refers to the advertising that is targeted to an individual based on his or her purchase histories, which is ubiquitous in the age of e-commerce. This chapter examines the competitive effects of PBTA by establishing a two-period duopoly model: the first period consists of the consumer information gathering process while the second is the period where PBTA is embraced. Based on this model, it is found that PBTA may improve or damage industry profits, consumer surplus, as well as social welfare. The conditions under which the competitive effect is positive or negative are derived, showing that whether PBTA is beneficial or detrimental depends on the content of advertising designed by the competing firms. It is suggested that firms under competitive environments cautiously deploy PBTA with appropriate advertising contents.
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This paper studies the role of targeting in a distribution channel composed of one manufacturer and one retailer. In channel interactions, the manufacturer can deploy targeted advertising while the retailer can initiate targeted pricing. Using a game-theoretic framework, we find the following results: (1) Targeted advertising increases the manufacturers profit at the expense of the retailer; (2) The retailer may be worse off using targeted pricing; (3) Targeted pricing discourages the manufacturer from launching targeted advertising which is a more severe threat to the retailer. Therefore, the retailer may optimally use targeted pricing, even when it hurts profit, to defend against the attack of targeted advertising by the manufacturer.
This paper presents empirical data on American adult Internet users’ knowledge about and perceptions of Internet advertising techniques. We present the results of in-depth interviews and an online survey focusing on participants’ views of online advertising and their ability to make decisions about privacy tradeoffs. We find users hold misconceptions about the purpose of cookies and the effects of clearing them, which limits cookie management as a self-help mechanism enabling user choice. Only 11% of respondents understood the text description of NAI opt-out cookies, which are a self-help mechanism that enables user choice. 86% believe ads are tailored to websites they have visited in the past, but only 39% believe there are currently ads based on email content, and only 9% think it is OK to see ads based on email content as long as their email service is free. About 20% of participants want the benefits of targeted advertising, but 64% find the idea invasive, and we see signs of a possible chilling effect with 40% self-reporting they would change their online behavior if advertisers were collecting data. We find a gap between people’s willingness to pay to protect their privacy and their willingness to accept discounts in exchange for private information. 69% believe privacy is a right and 61% think it is “extortion” to pay to keep their data private. Only 11% say they would pay to avoid ads. With the exception of contextual advertisements, we find most participants would prefer random ads to tailored ads, but approximately 20% of participants would rather tailored ads. We find participants are comfortable with the idea that advertising supports free online content, but they do not believe their data are part of that exchange. We conclude with observations for public policy, technologists, and education.
One-to-one promotions are possible when consumers are individually addressable and firms know something about each customer's preferences. We explore the competitive effects of one-to-one promotions in a model with two competing firms where the firms differ in size and consumers have heterogeneous brand loyalty. We find that one-to-one promotions always lead to an increase in price competition (average prices in the market decrease). However, we also find that one-to-one promotions affect market shares. This market-share effect may outweigh the effect of lower prices, benefiting the firm whose market share increases. Our results suggest that of two firms, the firm with the higher-quality product may gain from one-to-one promotions. Our model also has implications for the phenomenon of customer churn, where consumers switch to a less preferred brand due to targeted promotional incentives. We show that churning can arise optimally from firms pursuing a profit-maximizing strategy. Instead of trying to minimize it, the optimal way to manage customer churn is to engage in both offensive and defensive promotions with the relative mix depending on the marginal cost of targeting.
Conventional wisdom suggests that one of the goals of manufacturer advertising is to reduce the cross-price elasticity between products (make one's own and rivals' products appear to be substitutable in the eyes of consumers). Conventional wisdom also suggests that, all else being equal, retailers will be able to obtain better terms of trade from manufacturers the substitutable are the manufacturers' products. It follows that retailers should be opposed to advertising that has the effect of reducing cross-price elasticities and thus that manufacturer advertising can be a source of channel conflict. We show that these conventional wisdoms need not hold when only some consumers are exposed to the advertising messages. Using a Hotelling model of demand, we show that (1) manufacturers can be worse off from advertising that reduces the cross-price elasticities between their products, (2) channel conflict need not arise, even when the sole purpose of advertising is to affect cross-price elasticities, and (3) depending on its bargaining power, a retailer can be better off when the manufacturers' products are perceived to be less substitutable.
Our research investigates the competitive ramifications of individual marketing and information management in today's information-intensive marketing environments. The specific managerial issues we address are as follows. First, what kinds of incentive environments do competing firms face when they can only target individual customers imperfectly? Second, does the improvement in an industry's targetability intensify price competition in the industry such that all competing firms become worse off? Third, should a firm share its customer knowledge so as to improve its rival's targetability? Fourth, how should an information vendor sell its information that can improve a firm's targetability? Finally, do competing firms have the same incentives to invest in their own targetability?
To answer those questions, we develop a simple model à la Narasimhan (1988), in which each of the two competing firms have their own loyal customers and compete for common switchers. We assume that each firm can classify its own loyal customers and switchers correctly only with a less-than-perfect probability. This means that each firm's perceived customer segmentation differs from the actual customer segmentation. Based on their perceived reality, these two competing firms engage in price competition. As an extension, we also allow the competing firms to make their investment decisions to acquire targetability.
We show that when individual marketing is feasible, but imperfect, improvements in targetability by either or both competing firms can lead to win-win competition for both even if both players behave noncooperatively and the market does not expand. Win-win competition results from the fact that as a firm becomes better at distinguishing its price-insensitive loyal customers from the switchers, it is motivated to charge a higher price to the former. However, due to imperfect targetability, each firm mistakenly perceives some price-sensitive switchers as price-insensitive loyal customers and charges them all a higher price. These misperceptions thus allow its competitors to acquire those mistargeted customers without lowering their prices and, hence, reduce the rival firm's incentive to cut prices. This effect softens price competition in the market and qualitatively changes the incentive environment for competing firms engaged in individual marketing. A “prisoner's dilemma” occurs only when targetability in a market reaches a sufficiently high level.
This win-win perspective on individual marketing has many managerial implications. First, we show that superior knowledge of individual customers can be a competitive advantage. However, this does not mean that a firm should always protect its customer information from its competitors. To the contrary, we find that competing firms can all benefit from exchanging individual customer information with each other at the nascent stage of individual marketing, when firms' targetability is low. Indeed, under certain circumstances, a firm may even find it profitable to give away this information unilaterally. However, as individual marketing matures (as firms' targetability becomes sufficiently high), further improvements in targetability will intensify price competition and lead to prisoner's dilemma. Therefore, it is not only prudent politics but also a business imperative for an industry to seize the initiative on the issue of protecting customer privacy so as to ensure win-win competition in the industry.
Second, we show that the firm with a larger number of loyal customers tends to invest more in targetability when the cost of acquiring targetability is high. However, the firm with a smaller loyal base can, through information investment, acquire a higher level of targetability than the firm with a larger loyal base as long as the cost of acquiring targetability is not too high. As the cost further decreases, competing firms will all have more incentives to increase their investments in targetability until they achieve the highest feasible level.
Third, an information vendor should make its information available nonexclusively (exclusively) when its information is associated with a low (high) level of targetability. When the vendor does sell its information exclusively, it should target a firm with a small loyal following if it can impart a high level of targetability to that firm.
Finally, our analysis shows that an information-intensive environment does not doom small firms. In fact, individual marketing may provide a good opportunity for a small firm to leapfrog a large firm. The key to leapfrogging is a high level of targetability or customer knowledge.
An important question that firms face in advertising is developing effective media strategy. Major improvements in the quality of consumer information and the growth of targeted media vehicles allow firms to precisely target advertising to consumer segments within a market. This paper examines advertising strategy when competing firms can target advertising to different groups of consumers within a market. With targeted advertising, we find that firms advertise more to consumers who have a strong preference for their product than to comparison shoppers who can be attracted to the competition. Advertising less to comparison shoppers can be seen as a way for firms to endogenously increase differentiation in the market. In addition, targeting allows the firm to eliminate “wasted” advertising to consumers whose preferences do not match a product’s attributes. As a result, the targeting of advertising increases equilibrium profits. The model demonstrates how advertising strategies are affected by firms being able to target pricing. Target advertising leads to higher profits, regardless of whether or not the firms have the ability to set targeted prices, and the targeting of advertising can be more valuable for firms in a competitive environment than the ability to target pricing.
Abstract This study attempts to answer a basic customermanagement,dilemma,facing firms: When should the firm use behavior-based pricing (BBP) to discriminate between ,its own ,and competitors’ customers in a competitive market? If BBP is profitable, when should the firm offer a lower price to its own customers rather than to the competitor's customers? This analysis considers two features of customer behavior hitherto ignored in BBP literature: heterogeneity in customer value and changing preference (i.e., customer preferences are correlated but not fixed over time). In a model where both consumers and competing firms are forward looking, we identify conditions when,it is optimal to reward,the firm’s own or competitor’s customers and when,BBP increases ordecreases profits. To the best of our knowledge, we are the first to identify conditions in
Abstract With advances in technology, the collection of information from consumers at the time of pur- chase is common,in many,categories. This information,allows a firm to straightforwardly classify consumers,as either "new" or "past" consumers. This opens the door for firms to implement,mar- keting that a) discriminates between,new,and past consumers,and b) entails making,offers to them that are significantly different. Our objective,is to examine,the competitive,effects of marketing that tailors offers to consumers,based on their past buying,behavior. In a two period model,with two competing firms, we assume that each firm is able to commit about whether or not to im- plement behavior-based discrimination, i.e. to add benefits to its offer for past consumers in the second,period. When,the firms,are identical in their ability to add value to the second,period offer, behavior-based discrimination (BBD) generally leads to lower profits for both firms. Past customers,are so valuable,in the second,period that BBD leads to cutthroat,competition,in the first period. As a result, the payoffs associated with the implementation of BBD form a Prisoners’ Dilemma. Interestingly, when a firm has a significant advantage over its competitor (one firm has the capability to add more benefits for its past customers than the other), it can increase its profit versus the base case even when there is significant competition in the second period. Moreover, the firm at a disadvantage,sometimes,finds that the best response to BBD by a strong competitor,is to respond,with a uniform,price and avoid the practice completely. Keywords: dynamic games, price discrimination, customer data, product design. i 1I ntroduction
The personal video recorder (PVR) facilitates the use of targeted advertising by allowing companies to monitor television viewing behavior and to build demographic profiles of viewers from the data that are collected. Our research explores the extent to which an advertiser should allocate resources to increase the quality of its targeting. We present a game-theoretic model that extends the conventional measurement of targeting quality by exploring the trade-off between two measures: accuracy and recognition. Accuracy measures the likelihood that any target segment prediction is correct, while recognition conversely measures the likelihood that any member of the target segment is identified. We find that the relative resources allocated to improving accuracy and recognition depend upon the size of the population of viewers, the propensity of viewers to skip commercials, the overall cost of airing commercials, and the competitive environment. Furthermore, the incentives to improve accuracy are markedly different from those to improve recognition. Although improving accuracy does not affect the extent of price competition, improving recognition leads to intensified price competition and reduced profitability in the product market. Thus, when facing a competitor that pursues a strategy to improve its recognition of potential customers, an advertiser should choose to reduce its investment in recognition and increase its investment in accuracy.
Firms sometimes try to "poach" the customers of their competitors by offering them inducements to switch. We analyze duopoly poaching under both short-term and long-term contracts assuming either that each consumer's brand preferences are fixed over time or that preferences are independent over time. With fixed preferences, short-term contracts lead to poaching and socially inefficient switching. The equilibrium with long-term contracts has less switching than when only short-term contracts are feasible, and it involves the sale of both short-term and long-term contracts. With independent preferences, short-term contracts are efficient, but long-term contracts lead to inefficiently little switching.
The Internet provides media firms with an unparalleled opportunity to target advertising towards their consumers. This paper considers how targeted advertising affects different media markets. I show that media firm profits rise and advertising prices rise the most with the ability to target advertising in more competitive media markets and those in which consumers are more averse to advertising. The results also have implications for the policy debate surrounding behavioral targeting techniques. In particular, in competitive media markets, targeted advertising may contribute to excessive media market entry and lead to under-provision of advertising. Such effects mitigate the positive welfare effects of targeting through improvements in the matching between consumers and advertisers.
This paper is a first look at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm which advertises the highest price in the first period will engage in price discrimination, a practice that clearly benefits the discriminating firm. This poaching gives rise to ‘the race for discrimination effect,’ through which price discrimination may act actually to soften price competition rather than intensify it. As a result, all firms may become better off, even when only one of them can engage in price discrimination. This paper offers a first attempt to evaluate the effects of price discrimination on the efficiency properties of advertising. In markets with low or no advertising costs, allowing firms to price discriminate leads them to provide too little advertising, which is not good for consumers and overall welfare. Only in markets with high advertising costs, might firms overadvertise. Regarding the welfare effects, price discrimination is generally bad for welfare and consumer surplus, though good for firms.
In this paper, we study a simple model in which two horizontally differentiated firms compete in prices and targeted advertising on an initially uninformed market. First, the Nash equilibrium is fully characterized. We prove that when the advertising cost is low, firms target only their “natural markets”, while they cross-advertise when this cost is high. Second, the outcome at equilibrium is compared with random advertising. Surprisingly, we prove that firms' equilibrium profits may be lower with targeted advertising relative to random advertising, while firms are given more options with targeted advertising.
I examine how the increasing ability of firms to target their advertise- ments to particular individuals influences market outcomes when consumers have access to advertising avoidance tools. Today firms possess an unprecedented and rapidly improving ability to discover details about individuals and reach them with advertising based on this information. For instance, as many readers know, an individual's web browsing activities may be tracked via information stored in his browser as long as he "participates" by not regularly deleting it, allowing ads to be customized to him upon visiting a web site. 1 Less well known may be that new technology allows Internet Service Providers (ISPs) to target ads by directly tracking which websites consumers visit, meaning that not participating is not an option for consumers. 2 Similarly,
Recently there has been an increased interest in using targeted advertising online: users are presented with advertisements that are a better match, based on their past browsing and search behavior and other available information (e.g., hobbies registered on a website). This technique, known as behavioral targeting, has been hailed as the new “Holy Grail” in online advertising because of its potential effectiveness. In this paper, we study the economic implications when an online publisher engages in behavioral targeting. The publisher auctions off an advertising slot and is paid on a cost-per-click basis. Using a horizontal differentiation model to capture the fit between a user and an advertisement being displayed, we identify the factors that affect the publisher's revenue, the advertisers' payoff, and social welfare. We show that revenue for the online publisher in some circumstances can double when using behavioral targeting. On the other hand, increased revenue for the publisher is not guaranteed: in some cases the prices of advertising and hence the publisher's revenue can be lower, depending on the degree of competition and the advertisers' valuations. We identify two effects associated with behavioral targeting: a competitive effect and a propensity effect. The relative strength of the two effects determines whether the publisher's revenue is positively or negatively affected. We also demonstrate that although social welfare is increased and small advertisers are better off under behavioral targeting, the dominant advertiser might be worse off and reluctant to switch from traditional advertising.
This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in Behaviour-Based Price Discrimination (BBPD). From a merger policy perspective, this paper's main contribution is two-fold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price-discriminate), but has no effect on the outsider firm's profitability, thereby eliminating the so called 'free-riding problem'. Second, this equilibrium merger is shown to increase industry profits at the expense of consumers' surplus, leaving total welfare unaffected. This then suggests that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD.
We develop a model with many advertisers (products) and many advertising markets (media). Each advertiser sells to a different segment of consumers, and each medium is targeting a different audience. We characterize the competitive equilibrium in the advertising markets and evaluate the implications of targeting. An increase in targeting leads to an increase in the total number of consumer-product matches, and hence in the social value of advertising. Yet, targeting also increases the concentration of firms advertising in each market. Surprisingly, we then find that the equilibrium price of advertisements is first increasing, then decreasing, in the targeting capacity. We trace out the implications of targeting for competing media. We distinguish offline and online media by their targeting ability: low versus high. As consumers’ relative exposure to online media increases, the revenues of offline media decrease, even though the price of advertising might increase.
We show that when a single media content distributor (such as a television cable company or an Internet provider) delivers advertising messages on behalf of multiple competing brands, it can sometimes utilize customized advertising to implement monopoly pricing. Even though such monopolistic pricing can be implemented with varying degrees of customization of commercials, product revenues and consumer surplus are highest when the distributor chooses the highest level of customization feasible. Consumers would, obviously, prefer aggressive price competition in product markets. However, given that collusion on prices is facilitated anyway, when the distributor acts as a common agent, the welfare of consumers is enhanced when commercials are better aligned with their preferences.
With the advent of panel data on household purchase behavior, and the development of statistical procedures to utilize this data, firms can now target coupons to selected households with considerable accuracy and cost effectiveness. In this article, we develop an analytical framework to examine the effect of such targeting on firm profits, prices, and coupon face values. We also derive comparative statics on firms' optimal mix of offensive and defensive couponing, the number of coupons distributed, redemption rates, face values, and incremental sales per redemption. Among our findings: when rival firms can target their coupon promotions at brand switchers, the outcome will be a prisoner's dilemma in which the net effect of targeting is simply the cost of distribution plus the discount given to redeemers.
In a two-period model of nondurable experience goods, we compare the profit and social welfare effects of behavior-based price discrimination (BBPD) and price commitment (PC) (relative to time-consistent pricing) in a monopoly. We find that when the static, full-information monopoly price is higher (lower) than the mean consumer valuation, PC yields higher (lower) profits and social welfare than BBPD. We also identify the market conditions under which BBPD does not increase firm profits and provide an explanation as to when the firm should discriminate against its first-time and repeat customers, respectively.
This article studies the dynamic effects of behaviour-based price discrimination and customer recognition in a duopolistic market where the distribution of consumers' preferences is discrete. Consumers are myopic and firms are forward looking. In the static and first-period equilibrium firms choose prices with mixed strategies. When price discrimination is allowed, forward-looking firms have an incentive to avoid customer recognition, thus the probability that both will have positive first-period sales decreases as they become more patient. Furthermore, an asymmetric equilibrium sometimes exists, yielding a 100-0 division of the first-period sales. As a whole, price discrimination is bad for profits but good for consumer surplus and welfare.
The introduction of independent retailers has long been recognized as a buffer that alleviates the price competition between
channels. In this paper, we argue that this effect may be counter-balanced if the manufacturers compete along dimensions that
differ from prices (such as advertising). We find that delegating to retailers may intensify other non-price competition between
the manufacturers and therefore make the manufacturers worse off. Our analysis shows that the “retailer buffer” may be a two-edged
sword and thus suggests that channel structure may critically depend on the specific dimensions along which the manufacturers
compete with each other.
KeywordsDistribution channel–Competition–Advertising–Game theory
When competing firms target information towards specific consumers through direct marketing activities, complete segmentation of markets can result. We analyze a two-stage duopoly where, prior to price competition, each firm targets information to specific consumers and only consumers informed by a firm can buy from it. This has the effect of endogenously determining market segments in a model of `sales'. In equilibrium, pure local monopoly emerges; firms target and sell to mutually exclusive market segments. When the cost of marketing approaches zero, market shares reflect relative production efficiency (equal shares when firms are symmetric); this may not be the case when marketing cost is high.
The targeting of informative advertising is often argued to increase efficiency, fostering competition and lowering market prices. Our analysis considers a particular type of targeting which serves to reach those consumers with a high valuation of the good. We show, within a monopolistic framework, that such targeting might lower both consumers surplus and, what is more remarkable, social welfare.
This chapter offers a comprehensive survey of the economic analysis of advertising. A first objective is to organize the literature in a manner that clarifies what is known. A second objective is to clarify how this knowledge has been obtained. The chapter begins with a discussion of the key initial writings that are associated with the persuasive, informative and complementary views of advertising. Next, work that characterizes empirical regularities between advertising and other variables is considered. Much of this work is conducted at the inter-industry level but important industry studies are also discussed. The chapter then offers several sections that summarize formal economic theories of advertising. In particular, respective sections are devoted to positive and normative theories of monopoly advertising, theories of price and non-price advertising, theories of advertising and product quality, and theories that explore the potential role for advertising in deterring entry. At this point, the chapter considers the empirical support for the formal economic theories of advertising. A summary is provided of empirical work that evaluates the predictions of recent theories of advertising, including work that specifies and estimates explicitly structural models of firm and consumer conduct. This work is characterized by the use of industry (or brand) and even household-level data. The chapter then considers work on endogenous and exogenous sunk cost industries. At a methodological level, this work is integrative in nature: it develops new theory that delivers a few robust predictions, and it then explores the empirical relevance of these predictions at both inter-industry and industry levels. Finally, the chapter considers new directions and other topics. Here, recent work on advertising and media markets is discussed, and research on behavioral economics and neuroeconomics is also featured. A final section offers some concluding thoughts.
The existing marketing literature suggests that persuasive advertising elicits counteractions from competing manufacturers and consequently leads to wasteful cancellation of the advertising effects. Thus, persuasive advertising is widely perceived to be combative in nature. A series of previously published papers demonstrates that appropriate targeting may partially mitigate the combative nature of persuasive advertising in that either the rival manufacturer or the retailer may benefit. In this paper, we complement their results by demonstrating the possibility that every channel member may benefit from persuasive advertising, i.e., a Pareto improvement along the distribution channel, thereby leading to the conclusion that persuasive advertising need not result in channel conflict.
“Behavior-based personalization” has gained popularity in recent years, whereby businesses offer personalized products based on consumers’ purchase histories. This paper highlights two perils of behavior-based personalization in competitive markets. First, although purchase histories reveal consumer preferences, competitive exploitation of such information damages differentiation, similar to the classic finding that behavior-based price discrimination intensifies price competition. With endogenous product design, there is yet a second peril. It emerges when forward-looking firms try to avoid the first peril by suppressing the information value of purchase histories. Ideally, if a market leader serves all consumers on day one, purchase histories contain no information about consumer preferences. However, knowing that their rivals are willing to accommodate a market leader, firms are more likely to offer a mainstream design at day one, which jeopardizes differentiation. Based on this understanding, I investigate how the perils of behavior-based personalization change under alternative market conditions, such as firms’ better knowledge about their own customers, consumer loyalty and inertia, consumer self-selection, and the need for classic designs.
This paper examines the impact of geographic targeting technology on local advertising markets when local and general media outlets compete for readers. In a base case, it is demonstrated that when the general outlet adopts such technologies, this does not impact on advertising prices or profits as that outlet expands ad space to meet demand. When wasted impressions are costly or there are advertiser capacity constraints that create competition between outlets for advertisers, this conclusion changes and there is a positive return to targeting. This adoption is likely to adversely impact on local outlet profits.
Our analysis treats advertisements and the goods advertised as complements in stable metautility functions, and generates new results for advertising by building on and extending the general analysis of complements. By assimilating the theory of advertising into the theory of complements, we avoid the special approaches to advertising found in many studies that place obstacles in the way of understanding the effects of advertising. We also use this approach to evaluate advertising from a welfare perspective. Whether there is excessive or too little advertising depends on several variables: the effects on consumer utility, the degree of competition in the market for advertised goods, the induced changes in prices and outputs of advertised goods, and whether advertising is sold to consumers. Copyright 1993, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Given that having bought earlier from a firm reveals something about the customers, the firms can try to use this piece of information by better fitting their market practices with respect to their previous customers. I consider an infinitely lived monopolist selling to a market where demand is composed of overlapping generations of forward-looking consumers. The monopolist can price differently to its previous customers than to its new customers. The new customers can either have chosen not to buy the product in the previous period or be new in the market. The main result is that, without full market coverage, the equilibrium involves cycles in the price being offered to the new customers. The monopolist is worse off than if it could not recognize its previous customers. The impact of durable goods, long-term contracts, and age recognition is also considered.
In many markets firms have some information about their customers resulting from the consumers' past choice behavior. Given this information, firms can better target their market practice with respect to their customers. This article considers such a situation in a duopoly with infinitely lived firms and overlapping generations of customers. A new customer may either have bought the competing product in the previous period or be new to the market. I identify three effects: (i) Firms lower prices to attract the competitor¹s previous customers. (ii) Greater consumer patience intensifies competition. (iii) Greater firm patience softens the competitive interaction. With patient firms and consumers, prices are lower than when there is no customer recognition.
This paper seeks to establish the importance of targeted advertising in media markets. Using zip-code level circulation for U.S. newspapers, I show that newspapers facing more competition have lower circulation prices but higher advertising prices than similar newspapers facing little or no competition. I explain this by showing that newspapers in more competitive markets are better able to segment readers according to their location and demographics. This leads to greater homogeneity in the characteristics of subscribers and raises advertisers' willingness to pay for such readers. The results imply a substantial benefit to advertisers and media firms from targeted advertising. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.
We investigate in this paper whether dynamic targeted pricing based on consumer purchase history could benefit a practicing firm even when consumers are "strategic" in that they actively seek to avail themselves of a low price in the future. Such strategic behavior on the part of consumers has been shown in the literature to render such dynamic targeted pricing unprofitable, even for a monopoly firm. We show that dynamic targeted pricing can benefit competing firms, when they actively pursue customer recognition based on consumer purchase history. This is because in order to pursue customer recognition, competing firms need to price high to "screen out" price-sensitive consumers and hence price competition is moderated. As a result, all competing firms can become better off with targeted pricing than without even when consumers behave strategically. Interestingly, because of this competition moderation effect, the paradoxical outcome occurs where dynamic targeted pricing may not benefit a monopolist, but it may benefit competing firms. We also show that dynamic targeted pricing can expand the market such that social welfare unambiguously improves.
The painful truth is that the Internet has been a letdown for most companies--largely because the dominant model for Internet commerce, the destination Web site, doesn't suit the needs of those companies or their customers. Most consumer product companies don't provide enough value or dynamic information to induce customers to make the repeat visits--and disclose the detailed information--that make such sites profitable. In this article, David Kenny and John F. Marshall suggest that companies discard the notion that a Web site equals an Internet strategy. Instead of trying to create destinations that people will come to, companies need to use the power and reach of the Internet to deliver tailored messages and information to customers. Companies have to become what the authors call "contextual marketers." Delivering the most relevant information possible to consumers in the most timely manner possible will become feasible, the authors say, as access moves beyond the PC to shopping malls, retail stores, airports, bus stations, and even cars. The authors describe how the ubiquitous Internet will hasten the demise of the destination Web site--and open up scads of opportunities to reach customers through marketing "mobilemediaries," such as smart cards, e-wallets, and bar code scanners. The companies that master the complexity of the ubiquitous Internet will gain significant advantages: they'll gain greater intimacy with customers and target market segments more efficiently. The ones that don't will be dismissed as nuisances, the authors conclude. They suggest ways to become welcome additions--not unwelcome intrusions--to customers' lives.
This paper analyzes how the transition from mass to specialized advertising can affect the market outcomes. To that end, we consider a particular technology of information transmission which allows a monopolist to decide the optimal targeting strategy. From this starting point, we show that the use of targeted advertising is likely to increase the market price and reduce the level of advertising, and that the degree of media specialization chosen by the monopolist tends to exceed the socially optimal. Furthermore, our model indicates that the social loss resulting from the greater monopoly power might exceed the gain due to the lower wasting of ads, in such a way that targeting could reduce consumer surplus and, what is more important, the level of social welfare. Copyright 2001 by Blackwell Publishing Ltd
This paper explores the implications of market segmentation on firm competitiveness. In contrast to earlier work, here market segmentation is minimal in the sense that it is based on consumer attributes that are completely unrelated to tastes. We show that when the market is comprised by two consumer segments and when there is sufficient variation in the per-consumer costs firms need to incur to access the different consumer populations, then firms obtain positive profits in symmetric equilibrium. Otherwise, the equilibrium is characterized by zero profits. As a result, a minimal form of market segmentation combined with advertising cost asymmetries across consumer segments give firms an opportunity to generate positive rents in an otherwise Bertrand-like environment.
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent-policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this survey draws the following conclusions from the literature. Firstly, different patent-policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
This paper proves that oligopolistic price competition with both targeted advertising and targeted prices can lead to a permanent fragmentation of the market into a local monopoly. However, compared to mass advertising, targeting increases social welfare and turns out to be more beneficial for consumers than for firms.
By its very nature, advertising is a prominent feature of economic life. Advertising reaches consumers through their TV sets, radios, newspapers, magazines, mailboxes, computers and more. Not surprisingly, the associated advertising expenditures can be huge. For example, Advertising Age (2005) reports that, in 2003 in the U.S., General Motors spent 3.32 billion to the advertisement of its detergents and cosmetics; and Pfizer incurred a $2.84 billion dollar advertising expense for its drugs. Advertising is big business indeed.
In this paper we study the role of promotional expenditures by sellers in a model of product differentiation. Advertising
conveys full and accurate information about the characteristics of products. Heterogeneous consumers, who have no source of
information other than advertisements, seek to purchase the products that best fit their needs. Despite the roles played by
advertising in improving the matching of products and consumers, and in increasing the elasticity of demand faced by each
firm, we find that the market-determined Jevels of advertising are excessive, given the extent of diversity in the market.
We derive a promotional equilibrium based on a specific information transmission technology, paying explicit attention to
the structure of consumer information and its impact on firms' demand curves. This allows us to study the effects of changes
in the advertising technology, including an increased ability to target messages to specific groups of consumers, on the equilibrium
in the product market. We find that decreased advertising costs may reduce profits by increasing the severity of price competition.
Toyota using DirecTV to aim RAV4 EV ads at tech-savvy viewers
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Targeted advertising in magazine markets. Working paper. University of British Columbia
- A Chandra
- U Kaiser
Facebook allows advertisers to target iOS IDs in custom audiences
- Inside Facebook