Advertising Media Planning, Optimal Pricing, and Welfare

• DOI: http://doi.org/10.1111/jems.12173
• Published date: 01 December 2016
• Date: 01 December 2016

Advertising Media Planning, Optimal Pricing, and

Welfare

LOLA ESTEBAN

Departamento de An´

alisis Econ´

omico

Facultad de Econom´

ıa y Empresa

University of Zaragoza

50.005 Zaragoza, Spain

lesteban@unizar.es

JOS´

EM. HERN ´

ANDEZ

Departamento de An´

alisis Econ´

omico

Facultad de Econom´

ıa y Empresa

University of Zaragoza

50.005 Zaragoza, Spain

hernande@unizar.es

This paper analyzes optimal media planning strategies in a pricing-advertising competition model

where firms can use mass and specialized advertising. We find that although targeted advertising

avoids the wasting of ads, firms might find it optimal to mix specialized advertising with the

mass media. We also show that the characteristics of the specialized media available crucially

affect the outcome of price competition between firms, which can range from a full fragmentation

of the market into local monopolies to lower average prices (compared to the case where firms had

only mass advertising available). Regarding welfare, we prove that although the use of specialized

advertising can lower consumer surplus and drive a fragment of consumers out of the market,

this advertising technology is welfare-improving, and can be Pareto superior.

1. INTRODUCTION

An important aspect of competition in differentiated product markets concerns the

strategic use of promotional strategies. When launching a new product, firms need to

create consumer awareness with an advertising campaign informing potential clients

about the existence, price, characteristics, etc., of their new goods. The correspond-

ing marketing strategy usually follows two steps: first, marketers collect and process

consumer-level information in order to characterize and identify (according to, for exam-

ple, demographic, socioeconomic, or geographical variables) the segments of consumers

who may be interested in their products; second, nowadays firms have a wide variety

of advertising outlets available with different costs, reach, etc., so a key point of the

marketing plan is to choose the right media planning strategy in order to efficiently

target the ads on the segments of potential buyers. In this regard, the use of highly

specialized advertising outlets (local newspapers or radios, specialized magazines, the

internet, etc.) may offer a seller the possibility of reaching potential consumer segments

with a high efficiency. Alternatively, the use of more general (mass) advertising media

implies reaching wider segments of the population, with the corresponding wasting of

The authors thank a coeditor and two anonymous referees for their helpful comments and suggestions.

C2016 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume25, Number 4, Winter 2016, 880–910

Advertising Media Planning 881

ads. Therefore, we can expect marketers to follow a simple media planning strategy:

they will choose to use specialized advertising, if available, whereas mass advertising

will be used only when targeting is not feasible (see Esteban et al., 2001; Iyer et al., 2005;

Galeotti and Moraga, 2008; Esteban and Hern´

andez, 2011). However, the empirical ev-

idence provided by the marketing literature (see, for example, Kotler and Armstrong,

2007; Kerin et al., 2009) reports that many firms use a mix of advertising media that

combines both specialized and mass advertising. This paper intends to explain this ap-

parent contradiction by arguing that targeted advertising is often imperfect in the sense

that with the specialized advertising media available, sellers cannot separate and reach

some segments of potential clients with a high degree of precision. Given this scenario

of imperfect targeting, our first goal is to characterize the firms’ optimal media planning

strategy so that we can understand when and how marketers mix targeting with mass

advertising. Second, it is clear that the selection of different advertising outlets by com-

peting firms determines the distribution of information across the market that, in turn,

can influence the pattern of price competition between rivals. Accordingly, this paper

also investigates the relationship between equilibrium media planning strategies and

optimal pricing, thus providing new insights into how the use of specialized advertising

versus mass advertising can affect market performance.

We analyze a model of price competition in which two firms sell a horizontally

differentiated product and where each firm identifies two segments of potential clients:

a captive group (who only buy from one of the firms) and another set of homogeneous

consumers who are price-sensitive (comparison shoppers who can buy from either

firm). Consumers are unaware of the existence of the goods and sellers can inform them

about their existence, price, and product specifications by using either mass advertising,

which covers the entire market (i.e., wasting some ads that reach consumers who are

not interested in the goods), or specialized (targeted) advertising, which allows firms to

focus the ads on those consumers who are interested in their products, thus eliminating

the wasting of ads. Regarding the properties of the targeting technology, a key point

concerns the degree of matching between the set of objective consumers and the reach of

the specialized media available. In our model, perfect matching occurs if there are three

specialized media available (one for each consumer segment), so firms can separate and

reach, with a high efficiency, the different segments of potential clients. However, the

matching between specialized media and objective consumers is likely to be imperfect.

The goal of this paper is to study the functioning of the market under imperfect targeting,

so we formulate an advertising technology capturing its essential features by assuming

that (i) sellers only have two specialized media available (i.e., imperfect separation between

consumer segments) and (ii) each advertising medium reaches one segment of captive

clients plus a different subset of comparison shoppers (i.e., targeting allows a firm to focus

the ads on potential buyers, but sellers cannot perfectly inform the price-sensitive segment of the

market).

We can illustrate this imperfect targeting by thinking about a geographical market

with two competitors located in two local primary territories (captive markets) and com-

peting for another set of (comparison) consumers located in an intermediate (secondary)

territory.Firms have some general (mass) advertising media available, like a radio or TV

station, which reaches the whole market. In addition, in each captive market, there is a

local newspaper or magazine containing specific (local) information, of interest only to

the residents in the primary territory, plus some more generic (regional) information of

interest mainly to residents in the secondary territory. In this setup, all newspaper buyers

located in a captive market will purchase the same local newspaper but those residents