Targeted Advertising and Consumer Inference

40 Pages Posted: 21 Sep 2020

See all articles by Jiwoong Shin

Jiwoong Shin

Yale School of Management

Jungju Yu

College of Business, Korea Advanced Institute of Science and Technology (KAIST); City University of Hong Kong (CityU) - Faculty of Business

Date Written: September 7, 2020

Abstract

The mere fact that consumers are targeted by advertisements can affect their inference about the expected utility of a product. We build a micro-model where multiple firms compete through targeted advertising. Consumers make inferences from targeted advertising about their potential match values for the product category, as well as the advertising firm's unobserved quality. We show that in equilibrium, upon being targeted by a firm, consumers make optimistic inferences about the product category and the firm's quality. With such improved beliefs, a targeted consumer is more likely to engage in a costly search throughout the category. We find that the increase in consumer search creates an advertising spillover beyond the level of the mere awareness effects of advertising and that firms' equilibrium level of targeted advertising can be non-monotonic in targeting accuracy. Additionally, we show that sometimes, it can be optimal for firms to relinquish customer data and instead engage in non-targeted advertising. The results provide insights into the trade-offs between advertising reach and targeting accuracy.

Keywords: targeted advertising, targeting accuracy, consumer inference, consumer search, reach and precision, value of information, prominence, free-riding

JEL Classification: C70, D83, L21, M31, M37

Suggested Citation

Shin, Jiwoong and Yu, Jungju and Yu, Jungju, Targeted Advertising and Consumer Inference (September 7, 2020). Available at SSRN: https://ssrn.com/abstract=3688258 or http://dx.doi.org/10.2139/ssrn.3688258

Jiwoong Shin

Yale School of Management ( email )

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06520 (Fax)

HOME PAGE: http://faculty.som.yale.edu/JiwoongShin/

Jungju Yu (Contact Author)

City University of Hong Kong (CityU) - Faculty of Business ( email )

10/F 239 Lau Ming Wai Academic Building
83 Tat Chee Avenue, Kowloon
Hong Kong
Hong Kong

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

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