Lola Esteban

Informative Advertising and Optimal Targeting in a Monopoly

This paper analyzes how the transition from mass to specialized advertising can affect the market outcomes. To that end, we consider a particular technology of information transmission which allows a monopolist to decide the optimal targeting strategy. From this starting point, we show that the use of targeted advertising is likely to increase the market price and reduce the level of advertising, and that the degree of media specialization chosen by the monopolist tends to exceed the socially optimal. Furthermore, our model indicates that the social loss resulting from the greater monopoly power might exceed the gain due to the lower wasting of ads, in such a way that targeting could reduce consumer surplus and, what is more important, the level of social welfare. Copyright 2001 by Blackwell Publishing Ltd

Customer Directed Advertising and Product Quality

This paper studies the relationship between three key elements of the marketing mix, namely, price, product, and promotion, in a model where a seller employs informative advertising to launch a new product. We propose a fairly general advertising technology for the study of three promotional strategies—mass, imperfectly targeted, and customer directed advertising (CDA). We find that both the private and the social incentives to use distinct advertising strategies are aligned, and that sales are likely to be promoted through CDA. Compared to mass advertising, with CDA the social planner reduces quantity and downgrades quality whereas the seller sometimes upgrades it. Our model of targeting with endogenous product quality provides some new insights into the way the transition from mass to specialized advertising can affect market outcomes. Quality distortions imply that (i) even if CDA increases the market price, the degree of market power need not increase and (ii) CDA may yield a welfare loss even if it leads to a lower market price. This discussion paper has resulted in a publication in the Journal of Economics and Management Strategy , 2006, 15(4), 943-68.

Advertising Media Planning, Optimal Pricing, and Welfare

This paper analyzes optimal media planning strategies in a pricing-advertising competition model where firms can use mass and specialized advertising. We find that although targeted advertising avoids the wasting of ads, firms might find it optimal to mix specialized advertising with the mass media. We also show that the characteristics of the specialized media available crucially affect the outcome of price competition between firms, which can range from a full fragmentation of the market into local monopolies to lower average prices (compared to the case where firms had only mass advertising available). Regarding welfare, we prove that although the use of specialized advertising can lower consumer surplus and drive a fragment of consumers out of the market, this advertising technology is welfare-improving, and can be Pareto superior. [ABSTRACT FROM AUTHOR]

Direct advertising and opt-in provisions: Policy and market implications

This paper formulates a game of pricing and informative advertising with horizontally-differentiated products in which two firms, first, compete with mass advertising and, later, build a database using their historical sales records and compete by targeting the ads to their potential customers. We study market interaction under two types of direct advertising: opt-in advertising, where firms ask consumers for their consent to send them ads with information about new products, and direct advertising without permission, where sellers use consumer contact information without their explicit consent. We show that, compared to the case where firms only use mass media, the use of direct ads (with or without permission) results in an intertemporal reallocation of market power from the first to the second period and that, compared to opt-in advertising, direct advertising without permission results in lower or equal prices. We also evaluate the impact of a regulatory policy aimed at protecting consumer privacy by banning the use of direct advertising without permission in favor of opt-in advertising. We find that this policy lowers social welfare and, if the degree of product differentiation is sufficiently high (vs. low), it does not affect (vs. lowers) firm profits and lowers (vs. increases) consumer surplus.