Theoretical and Empirical Essays on Personalized Advertising

Personalized advertising is becoming one of the most defining features of the twenty-first century marketplace. The two essays in this dissertation analyze two important theoretical and empirical dimensions of personalized advertising.

The first essay develops a model of costly advertising and price competition among n quality-cost differentiated firms in which the individual consumer is the basic unit of analysis. Strategies involve mixing over both prices and whether to advertise. In equilibrium, only the top two firms advertise, earning "Bertrand-like" profits. Welfare losses initially rise then fall with the ad cost, with losses due to excessive advertising and sales by the "wrong" firm. Additionally, taking the limit of advertising costs to zero selects the equilibrium where the most efficient firm prices (with probability one) at the cost of its closest rival.

The second essay develops a model of personalized advertisements and their impact on customers' purchase paths in the context of limited consideration sets. Personalized advertisements are more likely to be considered relative to generic advertisements. The consideration set expands from the status quo shopping list to the product in the advertisement when it is considered. Consideration of products outside a customer's status quo purchase path has the greatest expected increase on her consideration set and purchase basket while products along her purchase path have limited impact. I empirically test these predictions and find that personalized campaigns increase sales in the promoted department and in the store overall. Campaigns for regularly purchased products have little impact on sales in the department or store, even though redemption rates are higher. Generic campaigns have the least impact on sales.