Targeted advertising, concentration, and consumer welfare

Abstract

We develop a model of horizontal differentiation in which firms compete in both price and advertising where the latter adds value to consumption of the advertised product. Targeted advertising means not only that advertising is sent to specific individuals but also that the message content of such advertising is customized. As targeted advertising becomes less costly, market concentration and prices both increase. In equilibria where all consumers receive value-enhancing ads, consumer surplus rises. However, if targeting is incomplete, some consumers will be worse off. In some instances, these losses may be sufficiently large that total consumer surplus declines as well.