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.     

The benefits of being small: Duopolistic competition with market segmentation

Consider a duopolistic market in which consumers are not necessarily aware of the firms' existence. The market is characterized by the existence of four segments: a duopolistic segment which consists of consumers who are aware of both firms, a segment of consumers who are unaware of either firm and two captive market segments. We assume that by advertising, firms control the proportion of consumers who are aware of their existence. The relative sizes of the four segments affect the equilibrium of the duopolistic pricing game. We show that being large may be disadvantageous, and that even if gaining awareness is costless firms may wish to remain small.We would like to thank Paul Klemperer and an anonymous referee for valuable comments.     

Incentives through consumer learning about tastes

We consider a long-lived firm that faces an infinite sequence of finitely-lived consumers. In each period, the firm can exert either high or low effort, which is the firm's private information. When consumers learn about the firm's talent from the outcomes of previous transactions, there exists no equilibrium in which the firm always exerts high effort. However, when consumers learn about their own tastes, such an equilibrium can exist. Consumer learning about tastes therefore is an alternative to reputational concerns that produces stable incentives. We discuss the implications of this mechanism for advertising, advertising content, and consumer education.     

Consumer referrals

In many industries, firms reward their customers for making referrals. We analyze a monopoly’s optimal policy mix of price, advertising intensity, and referral fee when buyers choose to what extent to refer other consumers to the firm. When the referral fee can be optimally set by the firm, it will charge the standard monopoly price. The firm always advertises less when it uses referrals. We extend the analysis to the case where consumers can target their referrals. In particular, we show that referral targeting could be detrimental for consumers in a low-valuation group.     

Does advertising mislead consumers to buy low-quality products?

This paper investigates the interaction between consumer learning and advertising using a simulation model. Consumers use advertising to estimate the quality change, but learn advertising's trustworthiness through their consumption experience. Firms spend on not only advertising but also R&D to improve its product quality, following satisficing principles. We found that, if consumer learning is slow, an advertising-intensive firm captures most of the market in the long run despite its low product quality; in this sense, advertising misleads consumers. When learning is fast or when consumers do not rely on advertising at all, advertising is unlikely to mislead them. Easy imitation of rival products also prevents advertising from being misleading. These results are consistent with existing empirical findings on advertising-quality relationships.     

Advertising,industry innovation,and entry deterrence

With the advent of the Internet and social media platforms, advertising has become cheaper and more effective in reaching consumers. This paper studies the effect of better informative advertising on innovation and industry growth. This paper finds that improvements in informative advertising can lead to costly entry deterrence. Because advertising and innovation are complementary, better advertising raises the threats of entry. When innovation spillover is present in an industry, an incumbent firm has incentives to strategically lower its own innovation to deter entry. As a result, better advertising in innovation-intensive industries can have negative consequences on industry growth and consumer welfare. This paper also investigate the role of innovation spillover on entry deterrence.     

Optimal pricing and advertising strategy for introducing a new business product with threat of competitive entry

The problem of optimal joint pricing and advertising decision making for a new product facing potential competitive entry has received inadequate attention. We propose a model that attempts to find the optimal price-advertising frontier in the face of potential competitive entry that maximizes total discounted profits for pre- and post-entry periods. We find that a firm would charge the price that equates price elasticity to marginal revenue product of advertising (as predicted by [Dorfman, R. and Steiner, P.O. (1954), Optimal Advertising and Optimal Quality, American Economic Review, 44(5), 826-836.]) only when the potential effects of pricing and advertising on its market share are not considered. Under optimal conditions, aware that market share is subject to erosion, the firm charges a somewhat lower price than the profit maximizing price, and sets an advertisement expense that is somewhat higher than the profit-maximizing advertising level as predicted by Cournot's monopolistic setting. We illustrate the applicability of our model using business product examples taken from several industries including operating systems, software, pharmaceutical, and telephone switching. Directions for future research with implications for B2B managers (for example, the possible effects of preannouncement to forestall competitive entry) are discussed.     

Competitive targeted online advertising

This paper examines how an online publisher utilizes its information about consumer preference to target advertising. In our model, two firms first bid for a prominent ad position in a publisher-organized position auction, and then compete on price in the subsequent product marketplace. We consider two dimensions of consumer heterogeneity. First, consumers are heterogeneous in product preference. Based on their tastes, some consumers prefer one product over the other, whereas other consumers may rank the products in an opposite order. Second, consumers differ in search preference, i.e., “nonshoppers” only consider the advertised product, while “shoppers” always search both firms’ products before buying. We show that targeted advertising based on product preference will mitigate price competition in product markets as well as competition in position auctions, the latter to the detriment of the publisher. In contrast, targeted advertising based on search preference always benefits the publisher, as the winning firm can charge monopoly prices to nonshoppers. We show that the publisher’s optimal choice is to utilize only the information about consumer search preference. We also explore the welfare implications of targeted advertising based on different types of consumer preference.     

CUSTOMER POACHING AND ADVERTISING*

This paper is a first look at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm which advertises the highest price in the first period will engage in price discrimination, a practice that clearly benefits the discriminating firm. This poaching gives rise to ‘the race for discrimination effect,’ through which price discrimination may act actually to soften price competition rather than intensify it. As a result, all firms may become better off, even when only one of them can engage in price discrimination. This paper offers a first attempt to evaluate the effects of price discrimination on the efficiency properties of advertising. In markets with low or no advertising costs, allowing firms to price discriminate leads them to provide too little advertising, which is not good for consumers and overall welfare. Only in markets with high advertising costs, might firms overadvertise. Regarding the welfare effects, price discrimination is generally bad for welfare and consumer surplus, though good for firms.     

Predation by noisy advertising

The paper considers a market where heterogeneous consumers are imperfectly informed about product characteristics, and an incumbent firm has developed a clientele. In this context, the paper addresses the following question: Can the incumbent advertise in such a way as to make survival by a recent entrant infeasible? The main conclusion is that such a policy, which is termed noisy advertising, can generally succeed in driving the recent entrant from the market, and is likely to prove attractive to the incumbent.     

NETWORK SECURITY: VULNERABILITIES AND DISCLOSURE POLICY*

Software security is a major concern for vendors, consumers and regulators. When vulnerabilities are discovered after the software has been sold to consumers, the firms face a dilemma. A policy of disclosing vulnerabilities and issuing updates protects only consumers who install updates, while the disclosure itself facilitates reverse engineering of the vulnerability by hackers. The paper considers a firm that sells software which is subject to potential security breaches and derives the conditions under which a firm would disclose vulnerabilities. It examines the effect of a regulatory policy that requires mandatory disclosure of vulnerabilities and a ‘bug bounty’ program.     

Advertising efficiency and profitability: Evidence from the pharmaceutical industry

B2B firms spend considerable sums of money on promotional activities to promote their products and to build brand equity. An increasing proportion of this spending is being devoted to direct to end-user (DTE) advertising in an effort to pull end-users towards their products as a complement to their push promotional activities. This is particularly true for US-based pharmaceutical firms following the deregulation of DTE advertising. This trend suggests the necessity to investigate how efficiently DTE advertising expenditure is being managed, and to ascertain whether the level of efficiency has any impact on profitability. This study examined the level of DTE advertising efficiency for a sample of US-based pharmaceutical firms and went on to investigate the impact of the efficiency level on firm profitability. The findings of the study demonstrate that DTE advertising efficiency does vary between firms and, furthermore, that the higher the level of efficiency, the better is firm profitability. These results are robust to alternative measures of firm profitability, specifically, return on assets (ROA), return on equity (ROE), gross profit margin (GPM) and net profit margin (NPM).     

Advertising, Its Determinants, and Market Structure

This study derives a formal model of firm advertising behavior and applies it to the industry level to figure out the relationship between advertising and market structure. The firm advertising model shows that both consumer preference andfirm-specific advertising competence jointly determineprofit-maximizing advertising intensity. At the industry level, advertising intensity is represented multiplicatively by consumer preference and a measure of market structure, which reflects the joint distribution of the levels of advertising competence and market shares among firms. The new market structure measure suggests that those single-dimensional measures of market structure such as seller concentration and the Herfindahl index are inadequate in explaining interindustry differences in advertising intensity, and that the long-debated advertising-concentration relationship differs depending primarily on the appropriability of advertising. An empirical analysis of 426 five-digit Korean manufacturing industries shows that an inverted U-shaped relationship between the Herfindahl index and industry advertising intensity is observed for consumer goods industries but a lazy J-shaped relationship for producer goods industries.     

Strategic segmentation of a market

When competing firms target information towards specific consumers through direct marketing activities, complete segmentation of markets can result. We analyze a two-stage duopoly where, prior to price competition, each firm targets information to specific consumers and only consumers informed by a firm can buy from it. This has the effect of endogenously determining market segments in a model of ‘sales'. In equilibrium, pure local monopoly emerges; firms target and sell to mutually exclusive market segments. When the cost of marketing approaches zero, market shares reflect relative production efficiency (equal shares when firms are symmetric); this may not be the case when marketing cost is high.     

User Toolkits for Innovation: Consumers Support Each Other

User toolkits for innovation were recently proposed as a means to eliminate (costly) exchange of need-related information between users and manufactures in the product development process. The method transfers certain development tasks to users and thereby empowers them to create their own desired product features. This article examines the implications of different levels of opportunities for consumer involvement (OCI) in product development to learn what happens when firms pass design tasks on to consumers. It explores this issue by studying the relation between the employment of user toolkits and the need for firms to support their consumers. An analysis of 78 computer games products and the amount of support given by firms to the consumers of these products suggests that a share of the costs firms save on information acquisition by letting consumers "do it themselves" may eventually reemerge as costs in consumer support. In other words, an increase in opportunities for consumer involvement seems to increase the need for supporting consumers. A promising solution to the problem of support costs is identified, namely, the establishment of consumer–consumer support interaction. A case study of an outlier in terms of firm support to consumers—Westwood Studios—shows that consumers who use toolkits may be willing to support each other. Such interactive problem solving in a firm-established user community is advantageous to the firm, because the process reduces the amount of resources that the firm itself needs to dedicate to the support of consumers using toolkits. Generally, consumer-to-consumer interaction can facilitate problem-solving in the consumer domain, can aid the diffusion of toolkit related knowledge, and potentially can enhance the outcomes produced by the toolkit approach.     

Detecting Buyer Preferences to Guide Product Development and Advertising

If you could tell which product characteristics consumers would prefer, product development could be targeted sharply and positioning the product competitively could be done with more confidence. This article describes one approach by which a relatively large set of test products is evaluated by consumers in order to identify the most acceptable combination of product attributes. Identification of this combination provides the product developer with guidelines as to which test product should be selected for subsequent introduction. The focus is on the discovery of discernible attributes of a product in a fragmented category to support the advertising claim.     

Personalized pricing and advertising: Who are the winners?

This paper investigates who wins and who loses when firms depart from a mass advertising/uniform pricing strategy (benchmark model) to a targeted advertising/price discrimination one. Considering a duopoly market in which firms simultaneously compete in prices and advertising decisions, we examine the competitive and welfare effects of personalized pricing with targeted advertising by comparing equilibrium outcomes under customized advertising/ pricing decisions to the results arising under mass advertising and uniform pricing. We show that, when both firms compete in both market segments, all segment consumers are expected to pay higher average prices under the personalized advertising/pricing strategy. We also show that, in the context of our simultaneous game, targeted advertising with price discrimination might boost firms’ profits in comparison to the case of mass advertising and uniform prices. The overall welfare effects of the personalized strategy are ambiguous. However, even when the personalized strategy boosts overall welfare, consumers might all be worse-off. Thus the paper gives support to concerns that have been raised regarding the firms’ ability to adopt personalized strategies to boost profits at the expense of consumers.     

经营绩效反馈、环境不确定性与企业广告投入

基于2012～2015年深沪两市A股上市公司样本数据，对经营绩效反馈和企业广告投入之间的关系进行了理论分析和实证检验，并进一步考察了环境不确定性的调节作用。研究结果表明：（1）当企业未实现资本市场经营预期时，随着实际绩效低于经营预期程度的增大，企业广告投入将减少；（2）当企业实现资本市场经营预期时，随着实际绩效高于经营预期程度的增大，企业广告投入将增加；（3）当企业未实现资本市场经营预期时，与低不确定性环境相比，高不确定性环境中企业经营绩效负反馈对广告投入的负向影响将增强；（4）当企业实现资本市场经营预期时，与低不确定性环境相比，高不确定性环境中企经营绩效正反馈对企业广告投入的正向影响将增强。     

Referrals in search markets

This paper compares the equilibrium outcomes in search markets with and without referrals. Although it seems clear that consumers would benefit from referrals, it is not at all clear whether firms would unilaterally provide information about competing offers since such information could encourage consumers to purchase the product elsewhere. In a model of a horizontally differentiated product market with sequential consumer search, we show that valuable referrals can arise in the equilibrium: a firm will give referrals to consumers whose ideal product is sufficiently far away from the firm's offering. We allow firms to price-discriminate among consumers, and consumers to misrepresent their tastes. We found that the equilibrium profits tend to be higher in markets with referrals than in markets without. Consumers tend to be better off in the presence of referrals when search costs are not too low, and under a certain parameter range, referrals lead to a Pareto improvement.     

The Welfare Effect of Advertising Restrictions in the U.S. Cigarette Industry

The welfare effect of advertisingrestrictions in the U.S. cigarette industry dependsupon the impact of advertising on consumer and producer surplus, the transfer to consumers for being exposed to utility-reducing advertising, and smoking externalities. We estimate a demand equation and a supply relation simultaneously and use the parameter estimates to generate predictions of the impact of advertising restrictions on social welfare. Our results show that advertising restrictions benefit producers by limiting competition and generating higher industry profits, and such restrictions lower social welfare if the external cost of cigarette smoking is sufficiently low.