In-Store Advertising by Competitors

Conventional advice to firms in competitive markets is to raise barriers against competitive poaching of their customers. However, we see instances where a firm enables competitor advertising to its customers. For example, Walmart hosts banner ads for TVs from Sears to customers searching for TVs on Walmart.com, risking a loss of customers in exchange for a commission. This paper explores whether and under what conditions allowing competitor advertising in one's store may be a beneficial strategy. We analyze a duopoly market where customers are heterogeneous in search costs, information, and preferences. We find that hosting a competitor ad for an undifferentiated product can mitigate price competition and boost profits of both firms if the advertising commission is high enough. Otherwise, hosting competitor advertising may decrease the profits of both firms. Thus, there is no conflict of interest between firms in advertising and in setting the ad commission level. Yet the host prefers more efficient ads while the advertiser does not. Furthermore, the equilibrium outcome is asymmetric, with only one store featuring ads of the other. If stores are sufficiently differentiated in marginal costs of the product, the cost disadvantaged store will be the host. We show that the results are robust to displaying price in the ad, to different commission structures, and to customer uncertainty about the commission rate.