Strategic Targeted Advertising And Market Fragmentation

This paper proves that oligopolistic price competition with both targeted advertising and targeted prices can lead to a permanent fragmentation of the market into a local monopoly. However, compared to mass advertising, targeting increases social welfare and turns out to be more beneficial for consumers than for firms. The current proliferation of new and highly specialized communication channels (the Internet, cable TV, specialized press, etc.) is leading firms to progressively abandon the use of indiscriminate mass advertising to inform consumers about their new products in favor of targeted advertising, which allows sellers to concentrate their ads on particular segments of the potential demand, thus saving advertising costs.