Competitive targeted advertising with price discrimination

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). 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 than in its weak segment. The same result arises when the attractiveness of the weak segment is high and advertising is expensive enough. 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 than in its strong segment. The paper also investigates how advertising strategies and equilibrium profits are affected by price discrimination. In comparison to uniform pricing, firms can increase or reduce the intensity of advertising targeted to each segment when price discrimination is allowed. Further, when the attractiveness of the weak market is high, price discrimination boosts firms´ profits provided that advertising costs are sufficiently low. The reverse happens when advertising costs are high.