Competitive Effects of Purchase-Based Targeted Advertising

Authors:
Jianqiang Zhang;Weijun Zhong;Shue Mei
Affiliations:
School of Economics and Management, Southeast University, Nanjing, Jiangsu Province, China;School of Economics and Management, Southeast University, Nanjing, Jiangsu Province, China;School of Economics and Management, Southeast University, Nanjing, Jiangsu Province, China
Venue:
Journal of Electronic Commerce in Organizations
Year:
2012

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Abstract

This paper develops a two-period sales model to investigate the competitive effects of purchase-based targeted advertising. In the model, two competing firms gain consumer information during the first period sales, which allows them to target advertising based on consumer purchase history. Advertising is assumed to be persuasive in terms of consumer valuation enhancing and product differentiation increasing. The authors find that the firm's ability to target can damage industry profits, consumer surplus, and even social welfare. The conditions under which targeted advertising is positive or negative are derived, showing that price competition is softened in the second period but intensified in the first. It is suggested that firms under competitive environments cautiously sponsor targeted advertising with appropriate contents.