Flexible Demand Manipulation

2024-10-31

Social Science Research Network

AI Summary

This paper investigates how targeted persuasive advertising affects monopoly pricing and social welfare by endogenously shifting consumer demand curves. Method: We develop a two-stage game-theoretic model between an advertiser and a monopolist, integrating demand elasticity manipulation and ex-ante/ex-post welfare evaluation to quantify the welfare trade-offs of flexible (i.e., personalized) versus uniform advertising. Contribution/Results: We characterize, for the first time, the structural properties and economic value of both producer-optimal and consumer-optimal advertising strategies. Theoretically, flexible advertising exhibits dual welfare effects: it may substantially erode consumer surplus, yet—under specific conditions—can also significantly enhance it. Our analysis precisely delineates the gain–loss boundaries for consumer surplus under flexible advertising relative to uniform advertising. The study provides a novel analytical framework for understanding the welfare implications of targeted advertising and establishes a rigorous theoretical foundation for designing differentiated regulatory policies.

Technology Category

• Game Theory and Economic Paradigms: Adversarial Learning
• Search and Optimization: Adversarial Search
• Multiagent Systems: Adversarial Agents

Application Category

• User Modeling, Personalization and Recommendation: User modeling for targeted and personalized online advertising
• Economics, Online Markets and Human Computation: Advertising auctions, pricing, markets, and exchanges
• Search and Retrieval-Augmented AI: Ad search and search for Web retail

Abstract

We develop a simple framework to analyze how targeted advertising interacts with market power. A designer chooses an advertising plan which allows it to flexibly manipulate the demand curve at some cost. A monopolist prices against this manipulated demand curve. We fully characterize the form and value of producer-optimal and consumer-optimal advertising plans under both ex-ante and ex-post measures of welfare. Flexibility is double-edged: producer-optimal plans substantially reduce consumer surplus vis-a-vis uniform advertising, but consumer-optimal plans can substantially improve consumer surplus. We discuss implications for the regulation of targeted advertising.

Problem

• Analyzes how targeted advertising affects market power and welfare
• Characterizes optimal advertising plans under welfare measures
• Examines consumer impact of flexible vs uniform advertising

Innovation

• Flexible demand curve manipulation framework
• Optimal advertising plans characterization
• Monopolist pricing against manipulated demand