Competitive Targeted Advertising with Price Discrimination

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This paper provides useful implications for managers and marketing practitioners developing targeted advertising strategies. It addresses the following questions: In which circumstances should a firm spend more in advertising to the low preference customers segment (geo-conquesting) than to the strong segment? Under price discrimination, which segment of customers should be rewarded? Is price discrimination with targeted advertising profitable? An important contribution is to clearly describe what market features are needed for the two advertising outcomes-more intensive advertising in a firm's strong market, or in its weak market-to arise in equilibrium when firms are able to engage in targeted informative advertising. The paper shows that depending on the attractiveness of the weak market and the magnitude of advertising costs (high/low) it may be optimal for each firm to advertise more intensively in its strong market (standard result in the literature) or to advertise more intensively in its weak market. The first result prevails when the attractiveness of weak market is low (regardless of the advertising costs) and when the attractiveness of the weak market is high but advertising costs are high. The reason behind this result is each firms' attempt to mitigate price competition in its weak market. We add to the literature a new result: in a set-up in which consumers remain uninformed without advertising, it can be optimal for each firm to advertise more intensively in its weak than in its strong segment. This strategy is profitable when the attractiveness of the weak market is high enough and advertising is sufficiently cheap. In this case, each firm strategically reduces the intensity of advertising targeted to its strong market as a way to dampen price competition in that segment. The paper also provides useful insights regarding the profitability of price discrimination through targeted advertising, identifying the market features for which price discrimination boosts firms' equilibrium profits. Specifically, firms can be better off under price discrimination than under uniform pricing in markets where: (i) the attractiveness of the weak market is low (regardless the advertising costs) and (ii) the attractiveness of the weak market is high and advertising costs are sufficiently low. When advertising costs are sufficiently high, price discrimination is bad for profits.

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