Working Paper: CEPR ID: DP10464
Authors: Simon Anderson; Alicia Baik; Nathan Larson
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.
Keywords: Bertrand equilibrium; consumer targeting; mixed strategy equilibrium; price advertising; price dispersion
JEL Codes: D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Advertising costs (M37) | Firm profits (L21) |
| Advertising costs (M37) | Consumer surplus (D11) |
| Advertising (M38) | Social efficiency (D61) |
| Number of competing firms (L13) | Consumer welfare (D69) |