Customer Directed Advertising and Product Quality
We consider a market where a single seller must employ informative advertising to launch a new product of observable quality. The monopolist may use mass, targeted or customer directed advertising. We show that the choice of advertising strategy depends on the economic properties of the advertising technology. If this exhibits strong economies of targeting, customer directed advertising arises in equilibrium. Mass and targeted advertising arise under conditions that seem empirically quite restrictive. We also show that different advertising strategies have a bearing on the market outcome. While under mass and targeted advertising the price-quality choice of the monopolist equals that under full information, under customer directed advertising the seller brings fewer units to the market, and distorts the quality of the product and the price in a direction that depends on the nature of product quality.