De-targeting: advertising an assortment of products to loss-averse consumers

Karle, Heiko ; Peitz, Martin

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URN: urn:nbn:de:bsz:180-madoc-402154
Document Type: Working paper
Year of publication: 2016
The title of a journal, publication series: Working Paper Series
Volume: 16-03
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > VWL, Industrieökonomik, Wettbewerbspolitik u. Regulierung (Peitz 2007-)
MADOC publication series: Department of Economics > Working Paper Series
Subject: 330 Economics
Classification: JEL: L13 , D43 , M3,
Keywords (English): Targeted advertising , Informative advertising , Consumer loss aversion , Reference prices , Contextual inference , Consumer recognition , Behavioral industrial organization
Abstract: We consider product markets in which consumers are interested only in a specific product category and initially do not know which product category matches their tastes. Using sophisticated tracking technologies, an intermediary can make inferences about a consumer’s preferred product category and offer advertising firms the possibility to target their ads to match the consumer’s taste. Such targeting reduces overall advertising costs and, as a direct effect, increases industry profits. However, as we show in this paper, when consumers form reference prices and are loss averse, more precise targeting may intensify competition between firms. As a result, firms may earn higher profits from “de-targeted” advertising; i.e., when the intermediary deliberately informs about some products and their price quotes from outside a consumer’s preferred product category.

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