Economic Theory and Experimental Seminar - Regis Renault (Université of Cergy-Pontoise)

Room 605, Level 6, 111 Barry Street, Carlton

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Alex Nichifor

nichifor@unimelb.edu.au

T: +61 3 8344 7420

Title:   Targeted direct response advertising

Abstract:  Firms selling horizontally differentiated products target display advertisements to consumers who decide whether to click and then, whether to buy the product. Advertisers compete for consumer profiles through an auction. In equilibrium, they never select to improve targeting accuracy beyond a certain threshold. The threshold becomes less precise as the consumers' opportunity cost of clicking on an ad becomes larger. If the threshold is attained, then price advertising is used to induce consumers to click. If the threshold cannot be attained, then targeting is used to improve the conversion rate or to improve market power. If it is used only to improve the conversion rate, then a more accurate targeting leads to lower prices. Prices are advertised only if the consumers' click cost is large enough.