Customer Directed Advertising and Product Quality

26 Pages Posted: 26 Oct 2006

See all articles by Lola Esteban

Lola Esteban

University of Zaragoza - Department of Economic Analysis

José Hernández

University of Zaragoza - Department of Economic Analysis

José L. Moraga-González

VU University Amsterdam; University of Groningen

Abstract

This paper studies the relationship between three key elements of the marketing mix, namely, price, product, and promotion, in a model where a seller employs informative advertising to launch a new product. We propose a fairly general advertising technology for the study of three promotional strategiesmass, imperfectly targeted, and customer directed advertising (CDA). We find that both the private and the social incentives to use distinct advertising strategies are aligned, and that sales are likely to be promoted through CDA. Compared to mass advertising, with CDA the social planner reduces quantity and downgrades quality whereas the seller sometimes upgrades it. Our model of targeting with endogenous product quality provides some new insights into the way the transition from mass to specialized advertising can affect market outcomes. Quality distortions imply that (i) even if CDA increases the market price, the degree of market power need not increase and (ii) CDA may yield a welfare loss even if it leads to a lower market price.

Suggested Citation

Esteban, Lola and Hernández, José and Moraga-Gonzalez, Jose Luis, Customer Directed Advertising and Product Quality. Journal of Economics & Management Strategy, Vol. 15, No. 4, pp. 943-968, Winter 2006, Available at SSRN: https://ssrn.com/abstract=940139 or http://dx.doi.org/10.1111/j.1530-9134.2006.00123.x

Lola Esteban (Contact Author)

University of Zaragoza - Department of Economic Analysis ( email )

50005 Zaragoza
Spain

José Hernández

University of Zaragoza - Department of Economic Analysis ( email )

50005 Zaragoza
Spain

Jose Luis Moraga-Gonzalez

VU University Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

HOME PAGE: http://www.tinbergen.nl/~moraga/

University of Groningen

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV
Netherlands

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