Flexible Demand Manipulation

Abstract

We develop a simple framework to analyze how targeted advertising interacts with market power. A designer chooses an advertising plan which al- lows it to flexibly manipulate the demand curve at some cost. A monopolist prices against this manipulated demand curve. We fully characterize the form and value of producer-optimal and consumer-optimal advertising plans under both ex-ante and ex-post measures of welfare. Flexibility is double-edged: producer-optimal plans substantially reduce consumer surplus vis-a-vis uni- form advertising, but consumer-optimal plans can substantially improve consumer surplus. We discuss implications for the regulation of targeted advertising.

Keywords: Targeted Advertising, Market Power, Monopoly, Manipulation, Persuasion, Mechanism Design