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.     

PRICES,SPATIAL COMPETITION AND HETEROGENEOUS PRODUCERS: AN EMPIRICAL TEST*

Homogeneous‐producer models attribute lower prices in denser markets solely to lower optimal markups. I argue here that when producers have different production costs, competition‐driven selection on costs also reduces prices. This selection mechanism can be distinguished from the homogenous‐producer case because it implies that higher density leads not only to lower average prices, but to declines in upper‐bound prices and price dispersion as well. I find empirical support for this mechanism in the prices of ready‐mixed concrete plants. I also show these findings do not simply reflect lower factor prices in dense markets, but result instead because dense‐market producers are more efficient.     

Seasonality and the Effect of Advertising on Price

Does advertising make markets more or less competitive? This paper lays out an econometric strategy for estimating the effect of advertising on prices that exploits seasonal demand and imperfect targeting of consumers. We find mostly negligible effects of advertising on prices at monthly frequency: among the 35 (of 131) product categories with sufficient advertising seasonality to justify second‐stage estimation, only nine have a significant effect, and those are typically small. This finding is essentially the result of the much greater seasonality in advertising than price.     

The role of online platforms for media markets — Two-dimensional spatial competition in a two-sided market

We analyze the market for online and offline media in a model of two-dimensional spatial competition where media outlets sell content and advertising space. Consumer preferences are distributed along the style and type of news coverage where the distance costs may vary across dimensions. For integrated provision of online and offline platforms we show that entering the online market reduces average profits and may even constitute a prisoner's dilemma. Specialized provision may yield polarization in the style and type dimensions. This is in contrast to the maximum–minimum differentiation result previously established in the literature on multidimensional horizontal competition. We show that maximal differentiation in both dimensions occurs due to the discrete nature of the type dimension and asymmetric advertising markets.     

Do Newspaper JOAs Charge Monopoly Advertising Rates?

Conventional wisdom argues that all commercial and economic competition between two daily newspapers stops when they merge their advertising and printing capabilities to form a joint operating agreement (JOA). Clearly the JOA acts a monopolist in the sale of advertising, but there are two forces that may constrain the JOA to sell more advertising than a profit maximizing single paper monopolist would find optimal. First, there is the possibility of what is sometimes termed ``end game competition'. Disposition of assets from a JOA are often not determined until the JOA is near its termination date, and this may induce the weaker paper to maintain quality, both to improve its bargaining position and to keep open the possibility of remaining in the market as a competitor at the end of the JOA. Second, a daily paper arguably has to maintain a certain level of advertising and maintain a certain ``look' and ``feel' if it is to be considered a daily paper. This may constrain the JOA to sell more advertising and maintain a higher joint circulation than might be optimal for a single paper monopolist. We present econometric evidence that shows JOAs to have ad rates that are closer to those of competitive dailies than to those of single paper and 2-edition monopolists.     

Competition in Local Markets: Some Evidence from the Spanish Retail Banking Market

Using the entry threshold concept developed by Bresnahan and Reiss (Brookings Pap Econ Act 3:833–882, 1987), this paper examines how competitive conditions vary in independent local banking markets when the number of depository branches grows. With data on the Spanish retail banking sector in 2003, I estimate a discrete choice model to calculate the entry thresholds. The empirical evidence suggests that the entry of a new branch implies competition on a local level. Local branches seem to have some scope for changing prices fixed on national and regional levels. Moreover, the entry of new branches increases the competition among branches with instruments other than price (e.g., advertising, location, and promotion).      

The effect of air traffic delays on airline prices

A legislative change in takeoff and landing restrictions at LaGuardia Airport provides an opportunity to study the effect of an exogenous shock to product quality on prices in the airline industry. I test how the price response varies with the degree of competition in the market. I find that prices fall by $1.42 on average for each additional minute of flight delay, and that the price response is substantially larger in more competitive markets.     

Regulation of international roaming in the European Union—Lessons learned

This paper analyzes the evolution of prices and competition in intra-EU international roaming markets. It addresses three main research questions: (i) to what extent have market forces by themselves brought competition to retail roaming markets? (ii) Has the evolution of market dynamics in wholesale roaming improved competition? (iii) Is wholesale regulation sufficient to lead to a reduction in retail roaming prices? Data show that there has been little price-based competition both at wholesale and retail levels, despite prices being well above costs and the significant margins allowed by regulation. Available data from the period preceding the entry into force of the first EU roaming regulation also point to the same conclusion. Lack of competitive pressure in retail roaming markets and inelastic demand give little incentives for retail roaming service providers to lower prices. Wholesale international roaming markets have complex competition dynamics. They are characterized by the reciprocity of wholesale roaming agreements and traffic internalization inside transnational groups. These circumstances limit price competition at the wholesale level. The traditional regulatory approach applied to electronic communication markets has been primarily focused on wholesale regulation. However, empirical evidence shows that even if wholesale charges are reduced, retail roaming markets continue to operate at very high retail margins (for example, more than 200% retail mark-up over wholesale charges for data roaming services and incoming calls). This proves that in international roaming markets wholesale charge reductions are not necessarily passed on to retail prices. It can thus be inferred that wholesale price regulation alone is in most cases not sufficient to ensure that benefits are passed through to end users.     

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.     

Is targeted advertising always beneficial?

In this paper, we study a simple model in which two horizontally differentiated firms compete in prices and targeted advertising on an initially uninformed market. First, the Nash equilibrium is fully characterized. We prove that when the advertising cost is low, firms target only their “natural markets”, while they cross-advertise when this cost is high. Second, the outcome at equilibrium is compared with random advertising. Surprisingly, we prove that firms' equilibrium profits may be lower with targeted advertising relative to random advertising, while firms are given more options with targeted advertising.     

Inter-firm price coordination in a two-sided market

In many two-sided markets we observe that there is a common distributor on one side of the market. One example is the TV industry, where TV channels choose advertising prices to maximize own profit and typically delegate determination of viewer prices to independent distributors. We show that in such a market structure the stronger the competition between the TV channels, the greater will joint profits in the TV industry be. We also show that joint profits may be higher if the wholesale contract between each TV channel and the distributor consists of a simple fixed fee rather than a two-part tariff.     

The Adverstising Market in a Product Oligopoly

A model is developed in which producers in a differentiated product market compete in prices and informative advertising. The model also includes commercial media, which are linked to producers through the advertising market and to consumers through the media market. We investigate how certain market parameters, such as media market differentiation or product market differentiation, affect the competitive level advertising chosen in the market. The model shows that less product differentiation or more media differentiation leads to a higher market level of advertising. In the case of sufficiently high media differentiation, levels of advertising are in excess of the social optimum.     

Telemedicine competition,pricing, and technology adoption: Evidence from talk therapists

This paper examines how new telemedicine competitors affected incumbent health care providers during the first waves of COVID-19. Using data from the largest mental health provider search platform in Canada, I show that increased telemedicine competition in a market caused incumbent providers in that market to stop offering income-based discounts to patients. I isolate the causal effect of competition in a difference-in-differences framework, comparing providers before and after a supply shock on the platform that exogenously assigned some markets new telemedicine search results. I find that higher-quality providers are more likely to stop income-based discounts when facing new telemedicine entrants, while lower-quality providers are more likely to exit the platform, which is consistent with telemedicine providers competing for more price-sensitive patients. The results suggest that expanding telemedicine options had a heterogeneous effect on the affordability of care.     

Demand,Information, and Competition: Why Do Food Prices Fall at Seasonal Demand Peaks?

Prices for seasonal food products fall at demand peaks. Price declines are not driven by falling agricultural input prices; indeed, farm to retail margins narrow sharply. I use electronic scanner data from a sample of US supermarkets to show that seasonal price declines are closely linked to market concentration, and are much larger in markets with several rivals than where a single brand dominates. Seasonal demand increases reduce the effective costs of informative advertising, and increased informative advertising by retailers and manufacturers in turn may allow for increased market information and greater price sensitivity on the part of buyers.     

On the Absence of Directional Price Discrimination in the U.S. Airline Industry*

Certain forms of price discrimination in oligopoly markets can lead to more aggressive competition and lower profits, yet few empirical studies examine how extensively such strategies are used. I consider one such strategy, testing whether airlines charge different prices on the same flights to passengers that originate from different endpoints. Using fare quote data I formulate a new approach to measure discrimination while controlling for cost heterogeneity and find that carriers within the U.S. domestic market do not engage in directional price discrimination despite frequently using other similar pricing strategies that are unlikely to enhance competition.     

Crossownership and media concentration

This paper investigates whether media concentration permits newspaper and group owners of television stations to charge higher advertising rates than other types of owners. The prior studies that have looked at this issue have had to rely on questionable data. This study focuses on more accurate data, i.e. selling prices. It is argued that the potential for higher advertising rates could cause newspaper and group owners to pay higher prices for television stations than other types of buyers. An empirical analysis was made of sales of television stations between 1960 and 1969. The results tend to show that newspaper owners were willing to pay higher prices. A second analysis was done to determine whether the higher prices were due to market power or economies of scale. The results tend to show that the higher prices were probably due to the market power possessed by newspaper owned stations, some of which spills over to the other stations in the market.     

Retailer entry conditions and wholesaler conduct: The theatrical distribution of motion pictures

I add to the empirical literature on vertical contracting and wholesaler conduct by using retailer entry conditions to infer unobserved choice variables and equilibrium responses to prices and advertising. After estimating the US demand for theatrical motion pictures from 1990–96, I apply these techniques to compare observed outcomes to predictions under various distributor-conduct hypotheses. While several caveats apply, results indicate that the hypothesis of competition among distributors fails to describe advertising levels or aggregate payments of theaters to studios. The hypothesis of some collusion among distributors, however, matches the data fairly well.