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The Targeting of advertising

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An important question that firms face in advertising is developing effective media strategy. Major improvements in the quality and quantity of consumer information (due to information technology) and the growth of targeted media vehicles (due to media fragmentation and new communication channels) imply that firms now have the know-how and the means to precisely target advertising to segments of consumers within a market. This paper examines advertising strategy within a market. When firms can target advertising, the authors find they advertise more to consumers that have a strong preference for their product than to comparison shoppers who can be attracted to the competition. Advertising less to comparison shoppers can be seen as a way for firms to endogenously increase differentiation in the market. In addition, targeting allows a firm to eliminate "wasted" advertising to consumers whose preferences do not match the attributes provided by its product. As a result, the targeting of advertising increases equilibrium profits. Targeting can either lead to lower advertising expenditures by reducing wastage (if advertising is inexpensive) or lead to higher advertising expenditures because of improved advertising effectiveness (if advertising is costly). The model demonstrates how advertising strategies of firms are affected by firms being able to target pricing. Regardless of whether advertising is targeted or not, the gain that a firm realizes by being able to charge higher to consumers who have a distinct preference for its product is offset by increased price competition for comparison shoppers. In contrast, when firms have the ability to choose different advertising levels for different groups of consumers, it leads to higher profits independent of whether firms have the ability to set targeted prices. This implies that the targeting of advertising is more valuable than the ability to target pricing for firms in a competitive environment.

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