Abstract

We study a market with horizontally differentiated products and sequential consumer search. Firms send adverts to consumers to inform about their existence. Advertising may be either random or targeted. Targeting increases search intensity, which intensifies competition. However, targeted consumers draw higher valuations on average, which creates incentives to raise prices. The first effect dominates when search costs are sufficiently low, but the second may prevail when search costs are high. As a result, with high search costs, targeting results in higher prices and lower consumer surplus, while the opposite holds true when search costs are low. A larger advertising cost helps firms segment the market if they can target adverts.