The Impacts of Targeted Ad on a Monopoly's Vertically Differentiated Product Line and Media Strategies
Author
Abstract
The presence of targeted ad allows a marketer to reach some specific segment more effectively. In this paper we analyze the optimal vertical product line and advertising media strategies for a monopoly facing both the high-end and the low-end segments. We build a game-theoretic model where the monopolistic firm first chooses its product items, then advertising media strategy, and finally prices. Assuming targeted advertising can reach a specific segment more effectively while mass advertising can reach the whole market uniformly with a higher average rate, we obtain the following results. (i) The presence of targeted ad might allow a firm to segment the market to a finer level, thus alleviating the cannibalization problem, and hence extracting more rent from consumers of the high-end segment. When it happens, the firm can obtain a higher profit in spite of its advertising expenditure than when consumers are all aware of its products. (ii) When the reach rate of targeted ad is sufficiently high, the targeted high-end and the targeted low-end ads allow the firm to optimally achieve perfect price discrimination through both the high-end and the low-end items. (iii) When the firm has to spend ad to make consumers aware of its products, the presence of targeted ad makes it more likely for the firm to extend its product line upward than when consumers have perfect information about products.
Key Words
Targeted Ad, Media Strategy, Vertically Differentiated Product Line, Mass Ad
