Pricing with Endogenous Direct Advertising in a Monopoly

Pricing with Endogenous Direct Advertising in a Monopoly 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 mass-advertising 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. Review of Industrial Organization Springer Journals

Pricing with Endogenous Direct Advertising in a Monopoly

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Kluwer Academic Publishers
Copyright © 2004 by Kluwer Academic Publishers
Economics; Industrial Organization; Microeconomics
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  • Informative Advertising and Optimal Targeting in a Monopoly
    Esteban, L.; Gil, A.; Hernández, J. M.

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