Targeted advertising with R&D rivalry.

We analyze the effect of targeted informative advertising on firms' incentive to improve product quality and the welfare implications. We find that, compared with mass advertising, targeted advertising results in (i) a decreased incentive to invest in R&D unless the cost of advertising is sufficiently low, (ii) a lower mark-up, net of product quality, being charged to consumers, and (iii) a smaller (larger) proportion of uninformed consumers when the cost of advertising is low (high). The firms may earn higher or lower profits, but consumers are usually better off due both to the lower net mark-up and to improved product-consumer match. Under certain conditions though, the negative impact of more uninformed consumers dominates and leads to reduced consumer and total welfare. • The effect of targeted informative advertising in the presence of R&D rivalry is analyzed. • It results in a decreased the incentive for R&D unless advertising cost is sufficiently low. • Endogenous R&D expands the range in which targeted advertising benefits the firms. • Consumers usually benefit from lower net mark-up and better product-consumer match. • It is possible that consumer and total welfare decrease relative to mass advertising. [ABSTRACT FROM AUTHOR]