Targeting and Persuasive Advertising

Firms face a prisoner's dilemma when advertising in a competitive environment. In a Hotelling framework with persuasive advertisingfirms counteract this prisoner's dilemma with targeting. The firms even solve the prisoner's problem if targeted advertising is effective enough. Advertising turns from wasteful competition into profits. This is in contrast to wasteful competition as argument for regulations. A further result is maximum advertising differentiation: thefirms target their advertising to the extremes in the market.