Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2001-10-16 Number: 01-099/1 Author-Name: Lola Esteban Author-Name: Jose M. Hernandez Author-Workplace-Name: Universidad de Zaragoza Author-Name: Jose Luis Moraga-Gonzalez Author-Email: firstname.lastname@example.org Author-Workplace-Name: Groningen University Title: Customer Directed Advertising and Product Quality Abstract: 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. Classification-JEL: L12; L15; M37 Keywords: customer directed advertising; mass advertising; monopoly; quality; targeted advertising File-Url: http://papers.tinbergen.nl/01099.pdf File-Format: application/pdf File-Size: 393584 bytes Handle: RePEc:tin:wpaper:20010099