Title: On the welfare effects of price discrimination through targeted advertising
Abstract: This paper examines how should firms allocate their advertising budgets between consumers who have a high preference for their products (strong segment) and those who prefer competing products (weak segment). Advertising transmits relevant information to otherwise uninformed consumers and can be used as a price discrimination device. We build on the model of Esteves and Resende (2016), analyzing how the ability to price discriminate through targeted advertising may affect firms' strategic behavior and equilibrium welfare outcomes. We find that price discrimination does not necessarily lead to the classical prisoner dilemma arising in several other contexts. The comparison of the optimal marketing-mix under mass advertising and targeted advertising strategies reveals that targeted advertising might constitute a tool to dampen price competition. We find that average prices with non-discrimination (and mass advertising) can be below those with price discrimination and targeted advertising (regardless of the market segment). We also find that, when advertising costs are not too high, firms are better off with price discrimination by means of targeted advertising than with mass advertising/no discrimination. Finally, we show that overall welfare and consumer surplus can fall down when firms use targeted advertising instead of mass advertising.
Publication Year: 2016
Publication Date: 2016-04-18
Language: en
Type: article
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