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Pricing with Endogenous Direct Advertising in a Monopoly

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  • Lola Esteban
  • Agustín Gil
  • José Hernández

Abstract

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. Copyright Kluwer Academic Publishers 2004

Suggested Citation

  • Lola Esteban & Agustín Gil & José Hernández, 2004. "Pricing with Endogenous Direct Advertising in a Monopoly," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 25(2), pages 129-154, June.
    • Handle: RePEc:kap:revind:v:25:y:2004:i:2:p:129-154
    DOI: 10.1007/s11151-004-1094-y
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    References listed on IDEAS

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    1. Schmalensee, Richard, 1978. "A Model of Advertising and Product Quality," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 485-503, June.
    2. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
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    Cited by:

    1. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    2. Lola Esteban & José M. Hernández & José Luis Moraga‐González, 2006. "Customer Directed Advertising and Product Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 943-968, December.
    3. Lola Esteban & José M. Hernández, 2017. "Perfect versus imperfect direct advertising, and market performance," Journal of Economics, Springer, vol. 122(1), pages 1-27, September.
    4. Lola Esteban & José Hernández, 2011. "Specialized advertising and price competition in vertically differentiated markets," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 2(2), pages 255-282, June.
    5. Lola Esteban & José Hernández, 2014. "Endogenous direct advertising and price competition," Journal of Economics, Springer, vol. 112(3), pages 225-251, July.
    6. Esteban, Lola & Hernández, José M., 2017. "Direct advertising and opt-in provisions: Policy and market implications," Information Economics and Policy, Elsevier, vol. 39(C), pages 15-25.

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