Targeting Precision in Imperfect Targeted Advertising: Implications for the Regulation of Market Structure and Efficiency

Abstract

With the rapid development of e-commerce and related information technologies, consumers’ individual information can be accurately collected and analyzed according to their previous purchase histories or browsing behaviors. Then the targeted advertising can be directly sent to the heterogeneous consumers in the segmented market by the firms. This study aims to explore the possible role of targeting precision on the market structure. This assay set up a game-theoretical model with duopolistic firms. Both firms compete in prices and imperfect targeted advertising. In this setup, the targeting precision is variable. The results indicate that each competitive firm’s equilibrium profit varies with the targeting accuracy of targeted advertising and shows a U-shape variation with precision. Moreover, both firms’ profits reveal monotonic properties, improving targeting precision while using distinct advertising strategies. Then, the model is extended into n different competitive firms to seek the possible market capacity. The results prove that the equilibrium free-entry numbers of firms also exhibit a U-shape variation as a function of targeting precision while sending the imperfect targeted advertising to the consumers. This conclusion implies that the firm conducting imperfect targeted advertising with a moderate targeting precision is beneficial for the most efficient free-entry of new rival competitive firms and shows the most effective efficiency for the whole market.