Then you're sniping existing customers from other retailers, which is zero-sum when everybody does it, and it's possible for your competitors to tell when you're doing it and retaliate by doing the same. At which point you're both paying for advertising that only cancels out the competitor's advertising. A smart retailer is not going to be the first one to take a turn down that road. It's essentially iterated prisoner's dilemma.
And it may even be profitable to be the first to turn away from it when everybody else is on it, and instead use more of your ad spend for non-zero-sum customer generation. Then you get all the new customers to yourself while everyone else burns their margins fighting over the existing ones.
> That may be the genius of targeted ads. Once one vendor starts doing it, the other vendors have no choice but to bid on the same target.
Except that they do have a choice.
Suppose there are five competitors. Everybody knows Steve is going to buy a BMW 3 Series. The margin is $5000. Assuming everyone else is going to do what you're going to do, how much does it make sense to bid to advertise to Steve? If you bid $1000, you have a one in five chance of making a $5000 margin. If you bid $5000, you have a one in five chance of making $5000.
So the optimal amount to bid is $0, because you have the same one in five chance at $5000 if everyone bids $0 than if everyone bids $1000 or $5000, but then you have a $1000 expected value rather than a $0 or $-4000 one.
Now suppose the others aren't using the same utility function as you and so may bid a different amount and you get a bidding war. So the first thing that happens is somebody bids $100 expecting to make $5000 -- bully for them, until the second one bids $200. Everyone raises their bid to $1000 because that's what a 20% chance at $5000 is worth. If one of the competitors drops out, the others will raise their bid to $1250 because now it's a 25% chance.
Which means there's never any profit in it for the advertiser. If anybody plays then at least one competitor will retaliate and everybody loses a total of $5000 to the ad platform. If nobody plays, everybody gets an expected value of $1000. Being the first to quit costs you nothing, but being the first to play costs you and each of your competitors $1000. Who is going to play this game?
You are assuming the ads don't have any impact on where Steve goes to buy.
In reality what happens is marketing runs an ad for $3000 offering a $1000 incentive, Steve makes the purchase, and making gets to (possibly correctly) claim they netted $1000 in sales.
Those marketing people want to keep their jobs, so they are going to work hard to justify their existence!
> You are assuming the ads don't have any impact on where Steve goes to buy.
No, I am assuming that advertising works the same for everyone. If there are five dealers and fifty customers and with no advertising each dealer gets ten customers, then with each dealer spending $50,000 on targeted advertising, each dealer still gets ten customers. When each dealer spends the same amount they each get the same benefit, so they still split the existing customers five ways.
What you are describing sounds a whole lot like the Prisoner's Dilemma. For the highest personal success we need to think about maximizing group benefit, rather than being completely self-interested. However, this is rarely the case when competition is involved.
I don't know if this effect has a name, but this sort of thing happens in every industry. I noticed in on a popular tourist trap boardwalk where every restaurant had a "barker" out front trying to tell you to come in. It's basically added costs for all businesses with more or less a 0 increase in net demand for the set of businesses as a whole, it merely redistributes demand amongst them.
As he already said, it's called The Prisoner's Dilemma. The situation where everybody defects (everybody has a barker) is worse than the situation where nobody defects (barkers are unheard of). But the nobody-defects situation is unstable, because if Store A has a barker and Store B does not, then Store A will be swimming in money and Store B will go out of business (or, in reality, be forced to hire a barker themselves).
Probably the clearest example I can think of is doing a no-adblock Google Search for "Coca-Cola." The first result is an ad, put out by the Coca-Cola Company. This might not seem to make any sense, since the first non-ad result is an identical link to the same website, but imagine what Cott Corporation or PepsiCo would do if they could by the first result for their competitor...
And then there is me going into the only restaurant without a barker, because it was the only one I could check out the menu of without being hassled :)
Yeah, can get to a situation where an ad platform would be making more out of a market segment than the retailers in that segment.
If I have a $20 margin, I am better off giving Google $15 and getting an incremental $5 profit than not advertising. Even worse if my customers have a lifetime value of $50 it may make sense to give Google $45 and not see a return from my spend until years down the road while Google gets the $45 right now.
This is the main argument for a tax on advertising. Much of it is zero-sum. It adds real costs and runs up prices while providing no real benefit to anyone.
You've basically described the wireless carrier scene for the past decade. It is indeed zero sum, and the arms race in advertising resulted in increased costs for the end consumer.
And it may even be profitable to be the first to turn away from it when everybody else is on it, and instead use more of your ad spend for non-zero-sum customer generation. Then you get all the new customers to yourself while everyone else burns their margins fighting over the existing ones.