Targeted Advertising and Social Status

Transcription

1 Targeted Advertising and Social Status Nick Vikander University of Edinburgh

2

3 The Issue Firms often use targeted advertising (Esteban, Hernandez, Moraga-Gonzalez 2006)

4 The Issue Firms often use targeted advertising (Esteban, Hernandez, Moraga-Gonzalez 2006) But some advertising is remarkably untargeted Cars Fashion Electronics

5 The Issue Firms often use targeted advertising (Esteban, Hernandez, Moraga-Gonzalez 2006) But some advertising is remarkably untargeted Cars Fashion Electronics How can we explain this? What makes these examples different?

6 The Idea Informative advertising allows consumers not only to buy goods, but also to recognize goods when bought by others.

7 The Idea Informative advertising allows consumers not only to buy goods, but also to recognize goods when bought by others. Consumers may value social status

8 The Idea Informative advertising allows consumers not only to buy goods, but also to recognize goods when bought by others. Consumers may value social status Advertising can make purchases visible

9 The Idea Informative advertising allows consumers not only to buy goods, but also to recognize goods when bought by others. Consumers may value social status Advertising can make purchases visible Broad non-targeted advertising can then encourage conspicuous consumption by allowing consumers to signal through their purchases.

10 The Idea Novel Approach Signaling requires visibility - Veblen (1899), Frank (1985), Ireland (1994) Physical visibility is not enough, need recognition Consistent with examples: visible goods, associated with status

11 Preview of Results 1. Consumer status concerns will influence the firm s choice of advertising Advertise to poorer consumer who don t buy, to increase the willingness to pay of wealthier consumers who do

12 Preview of Results 1. Consumer status concerns will influence the firm s choice of advertising Advertise to poorer consumer who don t buy, to increase the willingness to pay of wealthier consumers who do 2. Consumer status concerns can also influence product variety Firm may reduce number of varieties, to achieve broad recognition at lowest possible advertising cost

13 Preview of Results 1. Consumer status concerns will influence the firm s choice of advertising Advertise to poorer consumer who don t buy, to increase the willingness to pay of wealthier consumers who do 2. Consumer status concerns can also influence product variety Firm may reduce number of varieties, to achieve broad recognition at lowest possible advertising cost 3. A ban on non-targeted advertising will increase both consumer and total surplus, but an advertising tax will not With a ban, the only way to achieve greater recognition is by expanding quantity sold

14 Relation to Literature Kapferer (2008), Kapferer and Bastien (2009), Miller (2009) The luxury brands with the highest brand equity... advertise in Vogue and GQ not so much to inform rich potential consumers that they exist, but to reassure rich potential consumers that poorer Vogue and GQ readers will recognize and respect these brands when they see them displayed by others (Miller 126) Wernerfelt (1990), Krahmer (2006)

15 Other Explanations 1) Cost Reasons Esteban, Hernandez and Moraga-Gonzalez (2006), Esteban, Gil and Hernandez (2001) 2) Signaling Product Characteristics Nelson (1974), Milgrom and Roberts (1986) 3) Framing effects

16 The Model Monopolist, sells N varieties of a good Zero production costs, lexicographic advertising costs Mass θ H θ L of consumers, type uniformly distributed on [θ L, θ H ] For each variety x j, firm sets p j and a j [θ L, θ H ] Type θ becomes informed about x j iff θ a j

17 The Model Monopolist, sells N varieties of a good Zero production costs, lexicographic advertising costs Mass θ H θ L of consumers, type uniformly distributed on [θ L, θ H ] For each variety x j, firm sets p j and a j [θ L, θ H ] Type θ becomes informed about x j iff θ a j

18 The Model Monopolist, sells N varieties of a good Zero production costs, lexicographic advertising costs Mass θ H θ L of consumers, type uniformly distributed on [θ L, θ H ] For each variety x j, firm sets p j and a j [θ L, θ H ] Type θ becomes informed about x j iff θ a j

19 The Model Monopolist, sells N varieties of a good Zero production costs, lexicographic advertising costs Mass θ H θ L of consumers, type uniformly distributed on [θ L, θ H ] For each variety x j, firm sets p j and a j [θ L, θ H ] Type θ becomes informed about x j iff θ a j

20 The Model Monopolist, sells N varieties of a good Zero production costs, lexicographic advertising costs Mass θ H θ L of consumers, type uniformly distributed on [θ L, θ H ] For each variety x j, firm sets p j and a j [θ L, θ H ] Type θ becomes informed about x j iff θ a j

21 The Model Unit demand: each consumer either buys nothing, or one unit of one variety of which he is informed Let I θ = {x j ; θ a j } denote the varieties about which θ is informed Either b θ =, or b θ = x j for some x j I θ A consumer only observes when another consumer buys a variety if he is informed about it Suppose b θ = x j. Then θ observes this purchase iff x j I θ

22 The Model Unit demand: each consumer either buys nothing, or one unit of one variety of which he is informed Let I θ = {x j ; θ a j } denote the varieties about which θ is informed Either b θ =, or b θ = x j for some x j I θ A consumer only observes when another consumer buys a variety if he is informed about it Suppose b θ = x j. Then θ observes this purchase iff x j I θ

23 The Model Unit demand: each consumer either buys nothing, or one unit of one variety of which he is informed Let I θ = {x j ; θ a j } denote the varieties about which θ is informed Either b θ =, or b θ = x j for some x j I θ A consumer only observes when another consumer buys a variety if he is informed about it Suppose b θ = x j. Then θ observes this purchase iff x j I θ

24 The Model Unit demand: each consumer either buys nothing, or one unit of one variety of which he is informed Let I θ = {x j ; θ a j } denote the varieties about which θ is informed Either b θ =, or b θ = x j for some x j I θ A consumer only observes when another consumer buys a variety if he is informed about it Suppose b θ = x j. Then θ observes this purchase iff x j I θ

25 The Model Unit demand: each consumer either buys nothing, or one unit of one variety of which he is informed Let I θ = {x j ; θ a j } denote the varieties about which θ is informed Either b θ =, or b θ = x j for some x j I θ A consumer only observes when another consumer buys a variety if he is informed about it Suppose b θ = x j. Then θ observes this purchase iff x j I θ

26 The Model Consumers enjoy both intrinsic and status utility where U θ = (1 λ)u I + λu S U I = θ1 bθ Let µ θ (θ) be the belief of θ about the type of a consumer whose true type is θ. Then 1 U S = θ H θ L θh θ L µ θ (θ)dθ Status utility depends on what other consumers believe about his type

27 The Model Consumers enjoy both intrinsic and status utility where U θ = (1 λ)u I + λu S U I = θ1 bθ Let µ θ (θ) be the belief of θ about the type of a consumer whose true type is θ. Then 1 U S = θ H θ L θh θ L µ θ (θ)dθ Status utility depends on what other consumers believe about his type

28 The Model Beliefs follow from Bayes rule, whenever possible, conditional on which varieties players can recognize If θ buys a variety that θ recognizes, then θ believes that θ is the average type who would buy that variety in equilibrium. If b θ I θ, then µ θ (θ) = 1 θh θ1 bθ =x q j dθ j θ L

29 The Model Beliefs follow from Bayes rule, whenever possible, conditional on which varieties players can recognize If θ does not buy any variety that θ recognizes, then θ believes that θ is the average type who would not buy any such variety in equilibrium. If b θ I θ, then µ θ (θ) = 1 θ H θ L x i I θ q i θh θ L θ1 bθ I θ dθ

30 Single Variety Proposition 1. There exists λ (0, 1) such that for all λ < λ, the firm uses non-targeted advertising. Specifically, if λ < λ, the firm sets a = (θ L, θ H ] and sells to all θ (θ H q, θ H ], where q = 2θ H λ(θ H + θ L ) 4(1 λ) < θ H θ L If λ λ, then the firm sets a = (θ L, θ H ] and sells to all consumers, q = θ H θ L.

31 Single Variety Solid line: types who buy the good Dotted line: types who receive an ad θl θh

32 Single Variety If θ is the lowest type to buy, the firm can set p = (1 λ)θ + λµ buy λµ not For fixed q and mass of consumers to receive an ad m, the firm sells to [θ H q, θ H ] If mass m of consumers are informed, we have [ π = q (1 λ)(θ H q) + λ( [ π = q (1 λ)(θ H q) + λ( m )(θ H q/2 ( θ L + θ H q θ H θ L 2 m )( θ H θ L θ H θ L 2 That implies a = (θ L, θ H ], and taking the FOC gives the solution ] ) ] )

33 Single Variety If θ is the lowest type to buy, the firm can set p = (1 λ)θ + λµ buy λµ not For fixed q and mass of consumers to receive an ad m, the firm sells to [θ H q, θ H ] If mass m of consumers are informed, we have [ π = q (1 λ)(θ H q) + λ( [ π = q (1 λ)(θ H q) + λ( m )(θ H q/2 ( θ L + θ H q θ H θ L 2 m )( θ H θ L θ H θ L 2 That implies a = (θ L, θ H ], and taking the FOC gives the solution ] ) ] )

34 Single Variety If θ is the lowest type to buy, the firm can set p = (1 λ)θ + λµ buy λµ not For fixed q and mass of consumers to receive an ad m, the firm sells to [θ H q, θ H ] If mass m of consumers are informed, we have [ π = q (1 λ)(θ H q) + λ( [ π = q (1 λ)(θ H q) + λ( m )(θ H q/2 ( θ L + θ H q θ H θ L 2 m )( θ H θ L θ H θ L 2 That implies a = (θ L, θ H ], and taking the FOC gives the solution ] ) ] )

35 Single Variety If θ is the lowest type to buy, the firm can set p = (1 λ)θ + λµ buy λµ not For fixed q and mass of consumers to receive an ad m, the firm sells to [θ H q, θ H ] If mass m of consumers are informed, we have [ π = q (1 λ)(θ H q) + λ( [ π = q (1 λ)(θ H q) + λ( m )(θ H q/2 ( θ L + θ H q θ H θ L 2 m )( θ H θ L θ H θ L 2 That implies a = (θ L, θ H ], and taking the FOC gives the solution ] ) ] )

36 Single Variety If θ is the lowest type to buy, the firm can set p = (1 λ)θ + λµ buy λµ not For fixed q and mass of consumers to receive an ad m, the firm sells to [θ H q, θ H ] If mass m of consumers are informed, we have [ π = q (1 λ)(θ H q) + λ( [ π = q (1 λ)(θ H q) + λ( m )(θ H q/2 ( θ L + θ H q θ H θ L 2 m )( θ H θ L θ H θ L 2 That implies a = (θ L, θ H ], and taking the FOC gives the solution ] ) ] )

37 Single Variety What if advertising costs were not lexicographic, but were instead larger? Profits generated from non-targeted advertising are proportional to λ, but decreasing in cost of advertising Identify λ with physical visibility or conspicuousness of the good. Expect more physically conspicuous goods to be more widely advertised

38 Quantity sold increasing in λ Single Variety q = 2θ H λ(θ H + θ L ) 4(1 λ) < θ H θ L 1) As λ increases, difference in WTP between consumers decreases 2) WTP from status concerns is (θ H θ L )/2, independent of q Increase q: status from buying and status from not buying both decrease, change cancels out Will physically conspicuous goods be more widely sold? Will a decrease in the price of advertising have larger impact on sales of physically conspicuous goods?

39 Quantity sold increasing in λ Single Variety q = 2θ H λ(θ H + θ L ) 4(1 λ) < θ H θ L 1) As λ increases, difference in WTP between consumers decreases 2) WTP from status concerns is (θ H θ L )/2, independent of q Increase q: status from buying and status from not buying both decrease, change cancels out Will physically conspicuous goods be more widely sold? Will a decrease in the price of advertising have larger impact on sales of physically conspicuous goods?

40 Quantity sold increasing in λ Single Variety q = 2θ H λ(θ H + θ L ) 4(1 λ) < θ H θ L 1) As λ increases, difference in WTP between consumers decreases 2) WTP from status concerns is (θ H θ L )/2, independent of q Increase q: status from buying and status from not buying both decrease, change cancels out Will physically conspicuous goods be more widely sold? Will a decrease in the price of advertising have larger impact on sales of physically conspicuous goods?

41 Quantity sold increasing in λ Single Variety q = 2θ H λ(θ H + θ L ) 4(1 λ) < θ H θ L 1) As λ increases, difference in WTP between consumers decreases 2) WTP from status concerns is (θ H θ L )/2, independent of q Increase q: status from buying and status from not buying both decrease, change cancels out Will physically conspicuous goods be more widely sold? Will a decrease in the price of advertising have larger impact on sales of physically conspicuous goods?

42 Multiple Varieties The firm will now face a new trade-off Broad non-targeted advertising to exploit status concerns, by allowing consumers to signal through their purchases But broad advertising will limit the firm s ability to price discriminate, as varieties essentially compete with one another First fix the number of varieties at some M N, and find the firm s optimal quantity sold and advertising. Then find the optimal number of varieties M.

43 Multiple Varieties The firm will now face a new trade-off Broad non-targeted advertising to exploit status concerns, by allowing consumers to signal through their purchases But broad advertising will limit the firm s ability to price discriminate, as varieties essentially compete with one another First fix the number of varieties at some M N, and find the firm s optimal quantity sold and advertising. Then find the optimal number of varieties M.

44 Multiple Varieties Proposition 2. In equilibrium, the firm sets critical values θ 1, θ 2,..., θ M such that θ L θ M <... < θ 2 < θ 1 < θ H. It sells x 1 to all types θ [θ 1, θ H ], and x j to all types θ [θ j, θ j 1 ) for 2 j M. The firm sets a 1 = (θ L, θ H ] and a j = (θ L, θ j 1 ) for 2 j M. It sets p j to make type θ j indifferent between buying x j and buying nothing. Some non-targeted advertising for all varieties Lower types receive more ads, but mostly for varieties they cannot afford

45 Multiple Varieties Proposition 2. In equilibrium, the firm sets critical values θ 1, θ 2,..., θ M such that θ L θ M <... < θ 2 < θ 1 < θ H. It sells x 1 to all types θ [θ 1, θ H ], and x j to all types θ [θ j, θ j 1 ) for 2 j M. The firm sets a 1 = (θ L, θ H ] and a j = (θ L, θ j 1 ) for 2 j M. It sets p j to make type θ j indifferent between buying x j and buying nothing. Some non-targeted advertising for all varieties Lower types receive more ads, but mostly for varieties they cannot afford

46 Two Varieties Solid line: types who buy each variety Dotted line: types who receive an ad for that variety θl θh

47 Multiple Varieties Fix quantity sold for each variety Just as with a single variety, optimal to sell only to those over a certain threshold Profits from status utility are λ M (µ j µ not )q j. j=1 These profits depend only on µ not, since M M q j j=1 ( )µ j + (1 q j )µ not = θ H + θ L. θ H θ L θ H θ L 2 j=1 Advertise each variety to all consumers. But then unable to price discriminate, since varieties sold to lower types are better deals

48 Multiple Varieties Fix quantity sold for each variety Just as with a single variety, optimal to sell only to those over a certain threshold Profits from status utility are λ M (µ j µ not )q j. j=1 These profits depend only on µ not, since M M q j j=1 ( )µ j + (1 q j )µ not = θ H + θ L. θ H θ L θ H θ L 2 j=1 Advertise each variety to all consumers. But then unable to price discriminate, since varieties sold to lower types are better deals

49 Multiple Varieties Fix quantity sold for each variety Just as with a single variety, optimal to sell only to those over a certain threshold Profits from status utility are λ M (µ j µ not )q j. j=1 These profits depend only on µ not, since M M q j j=1 ( )µ j + (1 q j )µ not = θ H + θ L. θ H θ L θ H θ L 2 j=1 Advertise each variety to all consumers. But then unable to price discriminate, since varieties sold to lower types are better deals

50 Multiple Varieties Proposition 3. If λ < 2 3, then the firm will sell M = N varieties. It will set q j = Q for all j, given by ( 2θH λ(θ H + θ L ) Q = min 2N + 2 λ(n + 3), θ ) H θ L N which is (weakly) increasing in λ. If λ 2 3, then the firm will sell M = 1 variety with q 1 = θ H θ L.

51 Two Varieties Solid line: types who buy each variety Dotted line: types who receive an ad for that variety θl θh

52 Two Varieties Solid line: types who buy each variety Dotted line: types who receive an ad for that variety θl θh

53 Two Varieties Solid line: types who buy each variety Dotted line: types who receive an ad for that variety θl θh

54 Two Varieties Solid line: types who buy each variety Dotted line: types who receive an ad for that variety θl θh

55 Multiple Varieties When λ is small, sell N varieties as in baseline but advertise each to all lower types than those who buy As λ increases, increase q for each variety, which leaves consumers better informed As λ increases still more, set q = (θ H θ L )/2 When λ 2/3 abandon all attempts to price discriminate, and advertise each variety to all consumers. Advertising costs are then proportional to M(θ H θ L ), so lowest when the firm sells a single variety.

56 Multiple Varieties When λ is small, sell N varieties as in baseline but advertise each to all lower types than those who buy As λ increases, increase q for each variety, which leaves consumers better informed As λ increases still more, set q = (θ H θ L )/2 When λ 2/3 abandon all attempts to price discriminate, and advertise each variety to all consumers. Advertising costs are then proportional to M(θ H θ L ), so lowest when the firm sells a single variety.

57 Multiple Varieties When λ is small, sell N varieties as in baseline but advertise each to all lower types than those who buy As λ increases, increase q for each variety, which leaves consumers better informed As λ increases still more, set q = (θ H θ L )/2 When λ 2/3 abandon all attempts to price discriminate, and advertise each variety to all consumers. Advertising costs are then proportional to M(θ H θ L ), so lowest when the firm sells a single variety.

58 Multiple Varieties When λ is small, sell N varieties as in baseline but advertise each to all lower types than those who buy As λ increases, increase q for each variety, which leaves consumers better informed As λ increases still more, set q = (θ H θ L )/2 When λ 2/3 abandon all attempts to price discriminate, and advertise each variety to all consumers. Advertising costs are then proportional to M(θ H θ L ), so lowest when the firm sells a single variety.

59 Two Varieties Solid line: types who buy each variety Dotted line: types who receive an ad for that variety θl θh

60 Two Varieties Solid line: types who buy each variety Dotted line: types who receive an ad for that variety θl θh

61 Two Varieties Solid line: types who buy each variety Dotted line: types who receive an ad for that variety θl θh

62 Two Varieties Solid line: types who buy each variety Dotted line: types who receive an ad for that variety θl θh

63 Welfare A strictly positive mass of consumers who buy each variety, and all consumers who do not buy any variety, have lower utility than if the firm did not sell the good. Consumers who do not buy have utility λµ not Price p j makes the lowest type to buy x j indifferent with his best outside option, which also gives λµ not Only low types do not buy, so µ not < ( θ H+θ L 2 ) All consumers may have lower utility

64 Welfare If λ > 2/3, then all consumers have lower utility than if the firm did not sell the good. λ > 2/3 implies q = θ H θ L The firm sets p = (1 λ)θ L + λ( θ H θ L 2 ) Type θ H has intrinsic utility (1 λ)θ H p > (1 λ)θ H iff λ > 2/3

65 Welfare Let N = 1 and say q < θ H θ L. Then both p would decrease, and both q and total surplus would increase if the firm used targeted advertising. The firm wants to inform consumers to exploit status effects With targeted advertising, the only way to do that is to expand output Total surplus depends only on intrinsic utility, which is increasing in q

66 Welfare Suppose the firm advertises to a mass m of consumers. To sell quantity q, the firm must set price m p = (1 λ)(θ H q) + λ( )( θ H θ L ). θ H θ L 2 If the firm sets m = q and wants to sell quantity q, it must set price Profits are q p = (1 λ)(θ H q) + λ( )( θ H θ L ). θ H θ L 2 π = q[(1 λ)(θ H q) + λ q 2 ]. where WTP from status concerns is now increasing in q.

67 Welfare Suppose the firm advertises to a mass m of consumers. To sell quantity q, the firm must set price m p = (1 λ)(θ H q) + λ( )( θ H θ L ). θ H θ L 2 If the firm sets m = q and wants to sell quantity q, it must set price Profits are q p = (1 λ)(θ H q) + λ( )( θ H θ L ). θ H θ L 2 π = q[(1 λ)(θ H q) + λ q 2 ]. where WTP from status concerns is now increasing in q.

68 Welfare Suppose the firm advertises to a mass m of consumers. To sell quantity q, the firm must set price m p = (1 λ)(θ H q) + λ( )( θ H θ L ). θ H θ L 2 If the firm sets m = q and wants to sell quantity q, it must set price Profits are q p = (1 λ)(θ H q) + λ( )( θ H θ L ). θ H θ L 2 π = q[(1 λ)(θ H q) + λ q 2 ]. where WTP from status concerns is now increasing in q.

69 Welfare Let N = 1. Then a linear tax on advertising volume cannot increase total surplus. Costs are linear, so the firm either uses fully targeted or fully non-targeted advertising The firm uses targeted advertising iff the tax exceeds a certain threshold But under targeted advertising, q is decreasing in the tax Any tax large enough to make the firm target would actually reduce output

70 Welfare With a linear tax t, profits are π = q[(1 λ)(θ H q) + λ m 2 ] mt. If the firm sets m = q rather than m = θ H θ L, there are two effects in opposite directions Status effects: increase q Cost of advertising effect: decrease q

71 Welfare With a linear tax t, profits are π = q[(1 λ)(θ H q) + λ m 2 ] mt. If the firm sets m = q rather than m = θ H θ L, there are two effects in opposite directions Status effects: increase q Cost of advertising effect: decrease q

72 Welfare With a linear tax t, profits are π = q[(1 λ)(θ H q) + λ m 2 ] mt. If the firm sets m = q rather than m = θ H θ L, there are two effects in opposite directions Status effects: increase q Cost of advertising effect: decrease q

73 Welfare With a linear tax t, profits are π = q[(1 λ)(θ H q) + λ m 2 ] mt. If the firm sets m = q rather than m = θ H θ L, there are two effects in opposite directions Status effects: increase q Cost of advertising effect: decrease q

74 Take Home A framework where consumers value social status and advertising makes purchases visible can help explain intentional non-targeted advertising restriction of product variety relation between advertising cost and quantity sold for conspicuous and non-conspicuous goods welfare effects of restricting advertising

75 Open Questions If we include a parameter for consumer taste, can we say when cheaper advertising will increase/decrease quantity sold? If very few consumers have a taste for the good, then beliefs about those who do not buy would not vary with sales Could this mechanism have something to do with comparative advertising? Key role of advertising in increasing stigma of outside option

76 Open Questions If we include a parameter for consumer taste, can we say when cheaper advertising will increase/decrease quantity sold? If very few consumers have a taste for the good, then beliefs about those who do not buy would not vary with sales Could this mechanism have something to do with comparative advertising? Key role of advertising in increasing stigma of outside option

77 Questions? Thank you!