Target or Not? Endogenous Advertising Strategy Under Competition

This paper considers two firms that compete on both advertising and pricing. Each firm decides whether to use mass advertising to cover the entire market or adopt targeted advertising to inform only the switching shoppers. We capture this problem through a dynamic game model in which each firm can endogenously choose its advertising strategy. Our results reveal a number of interesting findings. We show that the two firms would not choose mass advertising simultaneously but might adopt targeted advertising at the same time. Targeted advertising can hurt both firms even if it is more cost-efficient than mass advertising: when the marginal cost of advertising is moderate, the two firms may fall into the well-known trap of the prisoners' dilemma. In another interesting finding, symmetric firms may employ asymmetric advertising strategies in equilibrium: when the advertising cost is sufficiently low, one firm chooses targeted advertising, while the other adopts mass advertising. In addition, while a fixed cost associated with acquiring the targeting capability weakens firms' incentives to adopt targeted advertising, a large fixed cost might benefit firms in equilibrium.