Comparative and targeted advertising in competitive markets

Resumen

This dissertation takes a stand in the literature on advertising, wherein economists debate the purpose and the effects of advertising. The first two chapters analyze how the fact that advertising be comparative rather than regular affects price competition and advertising volume itself. In particular, chapter 2 is based on the persuasive view on comparative advertising, and chapter 3 advocates the informative view. Chapter 4 analyzes the trade-off for an advertiser between using targeted advertising and mass-audience advertising. The first chapter of this dissertation deals with persuasive advertising. A theoretical analysis of advertising wars is performed, where firms engage in deceptive comparative advertising against each other. It is argued in the chapter that there exists a noticeable distinction between comparative advertising and generic advertising due to the difference in effects they bring to the market outcomes. Moreover, we demonstrate how the fact that advertising be comparative rather than regular affects advertising intensity itself. The persuasive advertising is generally believed to be anti-competitive as it tends to make the demand for an advertised product more inelastic. Thus, it is argued that consumers would be better-off in the absence of advertising as they would face lower prices. It is shown in the chapter that the impact of comparative advertising on price competition depends on the vicious power of advertising. Chapter 3 examines the determinants of the strategic decision of a high quality producer to advertise comparatively against a low quality rival. The intuition suggests that the high quality producer faces a trade-off. First, comparative advertising reveals the existence of rival's brand, which gives the incumbent incentives not to use this promotional technique. This effect is the stronger the more people are unaware of the existence of the competitor in the market. Second, comparative advertising raises product differentiation at the informed segment, which makes it worth it for the incumbent to announce the lower quality of the new brand. This effect is the stronger the larger the difference between the expected quality and true quality of the rival product. Moreover, we investigate the role of price competition in the model. We discover that advertising makes low quality firm decrease her price. The fear of fierce price competition makes the high quality firm refrain from using comparative advertising. Finally, chapter 4 analyzes the determinants of advertising strategies of an industrial producer on the media market. In particular, we first highlight the pricing strategies of advertising space in magazines not only as a function of the readership size, but also as a function of the quality of the readers. Second, we analyze the relation between the media market and the market of industrial products, that is, the impact of readers' profile on the product prices via the advertising rates. Consequently, the following factors are endogenized: the size of the magazine's demand and the quality of readers, whose probability of purchasing the industrial product varies with the degree of content specialization of the media. Hence, in the strategic decision to buy advertising space in magazines, the firm will face a trade-off between the large readership size and the interesting profile of a reader. It is shown that a monopolist on the product market is able to segment the market by targeting its ads to certain groups and then practicing price discrimination by internalizing the difference in demand elasticities for the product among the two groups of consumers.