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QME

, Volume 7, Issue 3, pp 237–266 | Cite as

Targeted advertising as a signal

  • Bharat N. Anand
  • Ron ShacharEmail author
Article

Abstract

This study presents a signaling model of advertising for horizontally differentiated products. The central ingredients of the model are two important characteristics of advertising—targeting, and noisy information content. The theory yields interesting results about the informational role of targeted advertising, and its consequences. First, targeting can itself serve as a signal on product attributes. Second, the effectiveness of targeting depends not only on firms knowing consumer preferences, but on consumers knowing that firms know this. This creates a distinction between strategies of targeting and personalization. Third, the effectiveness of targeting in equilibrium may (far) exceed the information contained directly in the targeted message. Fourth, information content is not, however, superfluous. Specifically, when ads contain no information, a targeting equilibrium does not exist. Together, these results reveal how advertising conveys information both through the content of the message and the firm’s choice of advertising medium. Furthermore, the model is robust to the various critiques of prior work on ads-as-signals: namely, that ad content is irrelevant, ad exposure is unnecessary, and the choice of ads as signals is inherently arbitrary.

Keywords

Informative advertising Signaling game Targeting Media selection Advertising effectiveness 

JEL Classification

M37 D82 

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Harvard Business SchoolBostonUSA
  2. 2.Faculty of ManagementTel Aviv UniversityTel AvivIsrael
  3. 3.Fuqua School of BusinessDuke UniversityDurhamUSA

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