Attack and defend: the role of targeting in a distribution channel

Abstract

This paper studies the role of targeting in a distribution channel composed of one manufacturer and one retailer. In channel interactions, the manufacturer can deploy targeted advertising while the retailer can initiate targeted pricing. Using a game-theoretic framework, we find the following results: (1) Targeted advertising increases the manufacturers profit at the expense of the retailer; (2) The retailer may be worse off using targeted pricing; (3) Targeted pricing discourages the manufacturer from launching targeted advertising which is a more severe threat to the retailer. Therefore, the retailer may optimally use targeted pricing, even when it hurts profit, to defend against the attack of targeted advertising by the manufacturer.

Manufacturer defensive and offensive advertising in competing distribution channels

“…The pursuit of any of these strategic options generally affects product, pricing, marketing communications, and distribution decisions as firms strive to develop distinctive positioning to effectively appeal to the selected market segment(s). This research, like other studies before it, focuses on advertising targeting (e.g., Iyer et al, 2005;Wang et al, 2011;Zhang et al, 2016). Because several firms spend substantial shares of their marketing budgets on C advertising, finding optimal advertising targeting schemes is of great interest for both managers and researchers.…”

“…A few analytical works have investigated directly or indirectly advertising targeting in various contexts (e.g., Erickson, ; Iyer et al., ; Wang et al., , Martín‐Herrán et al., 2012; Zhang et al. ). For instance, in a duopoly market, Iyer et al.…”

“…In a bilateral monopoly, Zhang et al. () found that advertising targeting, compared to uniform advertising directed to the whole market, increases the manufacturer profit at the expense of the retailer. However, many of these previous works do not offer advertisers the possibility to use differentiated advertising programs to target different market segments.…”

“…On the other hand, Zhang et al. () investigated advertising targeting in a bilateral monopoly. They adopted Iyer et al.…”

“…This conventional knowledge remains however very generic and cannot serve as a practical framework for advertising targeting, especially in a competitive context. A few analytical works have investigated directly or indirectly advertising targeting in various contexts (e.g., Erickson, 1993;Iyer et al, 2005;Wang et al, 2011, Martín-Herrán et al, 2012Zhang et al 2016). For instance, in a duopoly market, Iyer et al (2005) found that advertising targeting that focuses on consumers whose preference match a product's attribute is more effective than a uniform advertising run across segments.…”