A Search Model of (Behavioral) Re-targeting

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• Department of Economics

This paper examines the impact of (behavioral) re-targeting on firm pricing. Re-targeting involves the use of ads to remind consumers of a previously searched product or service. Re-targeting is shown to have three effects on firm pricing. First, (for rational consumers) re-targeting encourages consumer search because it allows consumers to search because it allows them to return when they would otherwise have forgotten to do so. This effect tends to reduce prices. Second, firms that re-target get more returning demand, which, as is known, results in lower demand elasticity and thus higher prices. Finally, if re-targeting is costly, pricing incentives are affected by these costs but not always in the intuitive direction. Namely, re-targeting costs may well induce firms to reduce prices. We show that for some commonly used preferences the overall effect of costly re-targeting ads is to reduce prices, rather than increase them. Several extensions are explored, including consumer myopia, price discrimination, and asymmetric duopoly.

Co-authors: Mark Armstrong