Specialized advertising and price competition in vertically differentiated markets (original) (raw)
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Specialized advertising media and product market competition
Journal of Economics, 2011
This paper studies the strategic relationship between a specialized communication medium and a product market. To that end, we formulate a model of informative advertising and price competition where the advertising fee is endogenously determined by the interaction between two firms producing a horizontally-differentiated good and a communication platform. We find that (i) when the subscription to the medium is free, the platform asks for high prices for its advertising services, which allows firms to raise their prices to the level where the marginal potential consumer achieves zero utility and (ii) a positive subscription fee generates cross-side externalities between the firms and subscribers, which can increase or decrease the equilibrium advertising fee. In particular, under a positive advertising externality, the platform tends to charge low advertising fees, thus triggering strong price competition between firms. We also show that less product differentiation or a lower consumer valuation of the goods can increase firms' profits, so a strategic connection between the product and the media markets can substantially affect the functioning of a differentiated product market.
Price Competition and Advertising Signals: Signaling by Competing Senders
Journal of Economics & Management Strategy, 2001
Can price and advertising be used by vertically differentiated duopolists to signal qualities to consumers? We show that pure price separation is impossible if the vertical differentiation is small, while adding dissipative advertising ensures existence of separating equilibria. Two simple, but nonstandard, equilibrium refinements are introduced to deal with the multi-sender nature of the game, and they are shown to produce a unique separating and a unique pooling profile. Pooling results in a zero-profit Bertrand outcome. Separation gives strictly positive duopoly profits, and dissipative advertising is used by the high-quality firm when products are sufficiently close substitutes. Finally, compared to the complete information benchmark, the separating prices of both firms are distorted upwards when the degree of vertical differentiation is large, while they are distorted downwards when it is small.
Competitive Targeted Advertising with Price Discrimination
Marketing Science, 2016
This paper examines how firms should allocate their advertising budgets between consumers who have a high preference for their products (i.e., strong segment) and those who prefer competing products (i.e., weak segment). Targeted advertising transmits relevant information to otherwise uninformed consumers and it is used as a price discrimination device. With targeted advertising and price discrimination, we find that, when the attractiveness of the weak segment is low, each firm advertises more intensively in its strong segment. The same result arises when the attractiveness of the weak segment is high and advertising is sufficiently expensive. Interestingly, when the attractiveness of the weak segment is high but advertising costs are sufficiently low, it is optimal for each firm to advertise more intensively in its weak segment. The paper also investigates how advertising strategies and equilibrium profits are affected by price discrimination. Compared with uniform pricing, firms ...
Minimum Differentiation in Commercial Media Markets
Journal of Economics & Management Strategy, 2003
We examine a model of locational choice in commercial media markets. Commercial media (stations) compete for audiences with their choice of programming variety in order to attract advertising revenues from advertisers. These advertisers (producers) compete in a differentiated product market and rely on advertising to inform consumers about their product. We use the model to show that media have incentives to minimize the extent of differentiation between them. This incentive is an implication of the assumed role of advertising as information and as an ultimate nuisance to the audience. When stations minimally differentiate their programming offerings, producers choose lower levels of advertising. Consequently, lower levels of product information are available to consumers, permitting producers to gain higher margins on product sales. As a result, stations can negotiate higher payments for advertising space.
A Dynamic Model of Advertising and Product Differentiation
Review of Industrial Organization, 1998
This paper analyses a differential game of duopolisticrivalry through time where firms can use advertisingand price as competitive tools. Two cases are consideredwhereby: (1) advertising has the main effect ofincreasing market size and firms differ in productionefficiency; (2) advertising has both predatory and cooperativeeffects in a symmetric market. The former shows thatmarket shares and advertising shares are positivelycorrelated and that market size increases with thedifference in firms' relative efficiency. The latterhighlights the differences in the feedback andopen-loop strategies. It is shown that firms' advertisingare strategic complements and that profits are higherin the feedback equilibrium because firms advertise more.The applicability of the model in markets wherefranchise contracts and dealership agreements operateis also discussed.
Marketing Science, 2005
An important question that Þrms face in advertising is developing effective media strategy. Given the fragmentation of media (broadcast TV for example) and a multitude of new advertising media (the Internet, satellite shopping channels, and infomercials), Þrms have the ability to target advertising to speciÞc segments of consumers in a market. This paper examines advertising strategy with a model that allows for the targeting of advertising to different groups of consumers in a market with competing Þrms. When Þrms can target advertising to speciÞc segments in the market, we Þnd that they choose to advertise more to consumers that have a strong preference for their product than to comparison shoppers who are likely to be attracted away to competing products. Advertising less to comparison shoppers who shop across products can be seen as a way for Þrms to endogenously create additional differentiation in the market. In addition, targeting makes advertising more effective by eliminating "wasted" advertising to consumers who would not buy their product. Therefore the targeting of advertising increases equilibrium proÞts. Targeting can lead to lower advertising expenditures by reducing the wastage created by sending advertising to consumers who are unlikely to buy. But, interestingly, targeting can also lead Þrms to an increase in advertising spending. When advertising is expensive, the inability to target advertising leads to less advertising expenditures. In contrast, when Þrms can target advertising in these conditions, advertising spending is higher because improved effectiveness makes higher expenditures worthwhile.
Advertising and endogenous exit in a differentiated duopoly
Recherches économiques de Louvain, 2006
In this paper we consider a duopoly two-stage duopoly where firms first decide whether to invest in advertising and then compete in prices. Advertising has two effects: a market enlargement for both firms and a predatory gain for the investing firm only. Both symmetric and asymmetric equilibria may arise. The two most interesting cases are a coordination game where both firms investing and non-investing are equilibria, and a chicken game where only one firm invests while the other is possibly driven (endogenously) out of the market. Our results suggest that product differentiation has an ambiguous impact on investment in advertising and that strong product substitutability may induce a coordination problem.
Strategic targeted advertising and market fragmentation
Economics Bulletin, 2007
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.
Pricing with Endogenous Direct Advertising in a Monopoly
Review of Industrial Organization, 2004
This paper develops a model of informative advertising in which a firm builds a database using its historical sales records in order to directly target ads on those consumers who have a high probability of purchasing its products. We show that the firm can use this type of direct advertising as a screening mechanism to identify high demand consumers. As a result, direct advertising can work essentially as a device to increase a firm's monopoly power. From a social point of view, this implies that the transition from traditional massadvertising to direct advertising can generate a trade-off between higher advertising efficiency and greater monopoly power. We compute the model to shed light on the relative strength of these two forces, and find that while direct advertising might have a substantial negative impact on consumers, this advertising technology can only occasionally reduce welfare.
Targeted Value-Enhancing Advertising and Price Competition
Review of Industrial Organization, 2021
Digital markets provide firms with vast amounts of consumer data. Economists who have explored this phenomenon have focused on how firms use data to implement price discrimination. Targeted advertising in this context transmits different price information to different consumers. However, advertising is itself often valued by consumers, and can be viewed as a complement to the advertised product. Such advertising may also be customized and targeted. We investigate how targeted value-enhancing advertising affects competition. Competing for consumers with targeted advertising leads overall to higher prices and increases consumer surplus but reduces profitability. In certain markets the advertising is inefficiently over-supplied.