Personalized pricing and advertising: An asymmetric equilibrium analysis

We study personalized price competition with costly advertising among n quality-cost differentiated firms. Strategies involve mixing over both prices and whether to advertise. In equilibrium, only the top two firms advertise, earning “Bertrand-like” profits. Social efficiency is U-shaped in the ad cost, with losses due to excessive advertising and sales by the “wrong” firm. Quality or cost improvements at a customer’s best firm make her worse off. When firms are symmetric, the symmetric equilibrium has social surplus decreasing with n. However, we suggest an asymmetric equilibrium, with social surplus increasing in n, is more plausible for stability reasons. JEL Classifications: D43, L13