Excessive Targeting

Abstract

We consider a market with symmetric firms and asymmetric consumer groups. Firms send advertising messages which inform consumers about the existence and the price of their product (Butters, 1977). Targeting a specific consumer is imperfect as with some probability the consumer is not reached. We show that a higher targeting probability has a non-monotone effect on firms’ profit (and inversely on consumer surplus). If the probability of successfully targeting a specific consumer group is low, firms target high-type consumers and more fine-tuned targeting may amplify price competition between firms decreasing their profit. If the probability of successfully targeting is sufficiently high, however, more fine-tuned targeting may increase firms’ profit. Here, firms segment the market by targeting different consumer groups which reduces competitive pressure. We provide several extensions and robustness checks. (with Markus Reisinger)