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Discussion Paper Details

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Title: Personalized Pricing and Advertising: An Asymmetric Equilibrium Analysis

Author(s): Simon P Anderson, Alicia Baik and Nathan Larson

Publication Date: March 2015

Keyword(s): Bertrand equilibrium, consumer targeting, mixed strategy equilibrium, price advertising and price dispersion

Programme Area(s): Industrial Organization

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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Bibliographic Reference

Anderson, S, Baik, A and Larson, N. 2015. 'Personalized Pricing and Advertising: An Asymmetric Equilibrium Analysis'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10464