Flexible Demand Manipulation

TL;DR

This paper presents a framework for analyzing how flexible, targeted advertising influences market power and welfare, highlighting its potential to significantly harm or benefit consumers depending on its design.

Contribution

It introduces a simple, flexible demand manipulation model and characterizes optimal advertising strategies under different welfare measures.

Findings

Flexible advertising can substantially alter market outcomes.

Targeted manipulation can harm or benefit consumers depending on its design.

Optimal plans depend on welfare criteria and demand flexibility.

Abstract

We develop a simple framework to analyze how targeted persuasive advertising shapes market power and welfare. A designer flexibly manipulates the demand curve by influencing individual valuations at a cost. A monopolist prices against this manipulated demand curve. We fully characterize the form of optimal advertising plans under ex-ante and ex-post welfare measures. Flexibility per se is powerful, and can substantially harm or benefit consumers vis-a-vis uniform advertising. We discuss implications for regulation, intermediation, and the joint design of manipulation and information.