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Personalized pricing and advertising: An asymmetric equilibrium analysis

Author

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  • Anderson, Simon
  • Baik, Alicia
  • Larson, Nathan
Abstract
We study personalized price competition with costly advertising among n quality-cost differentiated firms. Strategies involve mixing over both prices and whether to advertise. In equilibrium, only the top two firms advertise, earning “Bertrand-like” profits. Welfare losses initially rise then fall with the ad cost, with losses due to excessive advertising and sales by the “wrong” firm. When firms are symmetric, the symmetric equilibrium yields perverse comparative statics and is unstable. Our key results apply when demand is elastic, when ad costs are heterogeneous, and with noise in consumer tastes.

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  • Anderson, Simon & Baik, Alicia & Larson, Nathan, 2015. "Personalized pricing and advertising: An asymmetric equilibrium analysis," Games and Economic Behavior, Elsevier, vol. 92(C), pages 53-73.
    • Handle: RePEc:eee:gamebe:v:92:y:2015:i:c:p:53-73
    DOI: 10.1016/j.geb.2015.05.006
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    Cited by:

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    2. Simon Anderson & Alicia Baik & Nathan Larson, 2023. "Price Discrimination in the Information Age: Prices, Poaching, and Privacy with Personalized Targeted Discounts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(5), pages 2085-2115.
    3. Simon P. Anderson & Bruno Jullien, 2015. "The advertising-financed business model in two-sided media markets," Post-Print hal-02866192, HAL.
    4. Didier Laussel & Ngo V. Long & Joana Resende, 2020. "The curse of knowledge: having access to customer information can reduce monopoly profits," RAND Journal of Economics, RAND Corporation, vol. 51(3), pages 650-675, September.
    5. David P. Myatt, 2019. "A Theory of Stable Price Dispersion," Economics Series Working Papers 873, University of Oxford, Department of Economics.
    6. Garella, Paolo G. & Laussel, Didier & Resende, Joana, 2021. "Behavior based price personalization under vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 76(C).
    7. Montez, João & Marxen, Annabelle, 2020. "Licensing at the patent cliff and market entry," CEPR Discussion Papers 14276, C.E.P.R. Discussion Papers.
    8. Didier Laussel & Joana Resende, 2022. "When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model," Post-Print hal-03740642, HAL.
    9. Margarita De-Miguel-Guzmán & Carlos Ronquillo-Bolaños & Alexander Sánchez-Rodríguez & Gelmar García-Vidal & Reyner Pérez-Campdesuñer & Rodobaldo Martínez-Vivar, 2020. "Analysis of the Effectiveness of Advertising Messages. Comparison by Media, Typology, and Schedule of Advertisements," Tržište/Market, Faculty of Economics and Business, University of Zagreb, vol. 32(1), pages 27-46.
    10. David Bounie & Antoine Dubus & Patrick Waelbroeck, 2021. "Selling strategic information in digital competitive markets," RAND Journal of Economics, RAND Corporation, vol. 52(2), pages 283-313, June.
    11. Didier Laussel & Ngo Van Long & Joana Resende, 2023. "Profit Effects of Consumers’ Identity Management: A Dynamic Model," Management Science, INFORMS, vol. 69(6), pages 3602-3615, June.
    12. Joao Montez & Nicolas Schutz, 2021. "All-Pay Oligopolies: Price Competition with Unobservable Inventory Choices [Extremal Equilibria of Oligopolistic Supergames]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2407-2438.
    13. Lei Yan & Yuxiang Zhang & Shue Mei & Weijun Zhong, 2024. "Personalized pricing with persuasive advertising and the value of consumer information: a duopoly framework," Electronic Commerce Research, Springer, vol. 24(3), pages 1533-1562, September.
    14. Sandro Shelegia & Chris M. Wilson, 2021. "A Generalized Model of Advertised Sales," American Economic Journal: Microeconomics, American Economic Association, vol. 13(1), pages 195-223, February.
    15. Schlosser, Rainer, 2017. "Stochastic dynamic pricing and advertising in isoelastic oligopoly models," European Journal of Operational Research, Elsevier, vol. 259(3), pages 1144-1155.
    16. Esteves, Rosa-Branca & Resende, Joana, 2019. "Personalized pricing and advertising: Who are the winners?," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 239-282.
    17. Shelegia, Sandro & Wilson, Chris, 2016. "A Generalized Model of Sales," EconStor Preprints 147411, ZBW - Leibniz Information Centre for Economics.
    18. Laussel, Didier & Long, Ngo Van & Resende, Joana, 2019. "The Curse of Knowledge: Having Access to Customer Information Can be Detrimental to Monopoly’s Profit," Discussion paper series HIAS-E-93, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    19. Didier Laussel & Joana Resende, 2022. "When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model," Management Science, INFORMS, vol. 68(12), pages 8872-8888, December.
    20. Laussel, Didier & Long, Ngo Van & Resende, Joana, 2020. "Quality and price personalization under customer recognition: A dynamic monopoly model with contrasting equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    21. Schlosser, Rainer, 2016. "Joint stochastic dynamic pricing and advertising with time-dependent demand," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 439-452.
    22. Siemering, Christian, 2023. "A model of endogenous targeting in duopoly," Information Economics and Policy, Elsevier, vol. 64(C).
    23. Arnold, Michael & Zhang, Lan, 2020. "Competition with an information clearinghouse and asymmetric firms: Why more than two firms compete (or not) for shoppers," Games and Economic Behavior, Elsevier, vol. 122(C), pages 55-82.
    24. Chen, Bintong & Chen, Jing, 2017. "When to introduce an online channel, and offer money back guarantees and personalized pricing?," European Journal of Operational Research, Elsevier, vol. 257(2), pages 614-624.

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    More about this item

    Keywords

    Consumer targeting; Price dispersion; Mixed strategy equilibrium; Bertrand equilibrium; Price advertising;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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