Attack and defend: the role of targeting in a distribution channel

This paper studies the role of targeting in a distribution channel composed of one manufacturer and one retailer. In channel interactions, the manufacturer can deploy targeted advertising while the retailer can initiate targeted pricing. Using a game-theoretic framework, we find the following results: (1) Targeted advertising increases the manufacturers profit at the expense of the retailer; (2) The retailer may be worse off using targeted pricing; (3) Targeted pricing discourages the manufacturer from launching targeted advertising which is a more severe threat to the retailer. Therefore, the retailer may optimally use targeted pricing, even when it hurts profit, to defend against the attack of targeted advertising by the manufacturer.