Effects of informative advertising on the formation of market structures

Abstract

Information overload is a common phenomenon in the advertising dynamics of the twenty-first century, this not only causes inefficiencies in terms of advertising spending, but also, its management affects firms’ potential market power. This article builds a model in which firms compete by sending informative ads to passive consumers with reduced attention. Ads are sent through different transmission technologies, distinguished by their levels of information on consumer preferences. In equilibrium, sender strategies from firms with better-informed transmission technologies dominate sender strategies from firms with worse-informed transmission technologies, generating latent market power as a result of higher efficiency in ad location. This contribution is contrary to pro-competitive effects stated by current literature on strictly informative advertising. For context and simplicity, an iterative simulation of the model in equilibrium is carried out for the case of two transmission technologies, with the best-informed transmission technology belonging to an intermediary monopolist: the segmentation agent. The simulation yields consistent evidence of market power and industrial concentration in favor of firms that resort to intermediation by the segmentation agent. Our findings can be applied to suggest state intervention policies towards segmentation monopolists/oligopolists in information markets, to promote competition and diminish information overload.