Dr. Miguel Villas Boas
Haas School of Business, University of California, Berkeley

"Behavioral-Based Advertising"

Abstract: This paper considers the effect of firms sending advertising messages to consumers based on their past purchase behavior. If past purchase behavior on a product category is positively correlated with a consumer having high preferences in another category, a firm may want to advertise more intensively to those consumers that purchased the former category, if possible. The paper finds that this will lead to higher prices in the initial category as consumers expect a possible additional surplus from the category affected by behavioral advertising. If receiving advertising does not yield too much dis-utility to consumers, firms end up better off due to both higher prices, and the increased demand of better targeted advertising. The paper also investigates the effects of joint behavioral pricing and advertising, and of different firms benefiting from the purchase information.