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Empirical Analysis of Closed-Loop Duopoly Advertising Strategies

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  • Gary M. Erickson

    (Department of Marketing and International Business DJ-10, University of Washington, Seattle, Washington 98195)

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    Abstract

    Closed-loop (perfect) equilibria in a Lanchester duopoly differential game of advertising competition are used as the basis for empirical investigation. Two systems of simultaneous nonlinear equations are formed, one from a general Lanchester model and one from a constrained model. Two empirical applications are conducted. In one involving Coca-Cola and Pepsi-Cola, a formal statistical testing procedure is used to detect whether closed-loop equilibrium advertising strategies are used by the competitors rather than open-loop strategies. In the second application, involving Anheuser-Busch and Miller, the general model is estimated. Results indicate that closed-loop equilibria better explain dynamic advertising competition than do open-loop equilibria. Also, closed-loop equilibrium advertising strategies implied by model estimates show that competitive advertising levels may or may not be monotonic in market share.

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    File URL: http://dx.doi.org/10.1287/mnsc.38.12.1732
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 38 (1992)
    Issue (Month): 12 (December)
    Pages: 1732-1749

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    Handle: RePEc:inm:ormnsc:v:38:y:1992:i:12:p:1732-1749

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    Related research

    Keywords: marketing; competitive strategy; advertising; games; noncooperative; differential;

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    Cited by:
    1. Golan, Amos & Karp, Larry S. & Perloff, Jeffrey M., 1998. "Estimating Coke and Pepsi's Price and Advertising Strategies," Competition Policy Center, Working Paper Series qt18b1q4kr, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    2. Erickson, Gary M., 1995. "Differential game models of advertising competition," European Journal of Operational Research, Elsevier, vol. 83(3), pages 431-438, June.
    3. Toker Doganoglu & Daniel Klapper, 2006. "Goodwill and dynamic advertising strategies," Quantitative Marketing and Economics, Springer, vol. 4(1), pages 5-29, March.
    4. Richards, Timothy J. & Patterson, Paul M., 2002. "Strategic Interaction With Multiple Tools: A New Empirical Model," Working Papers 28545, Arizona State University, Morrison School of Agribusiness and Resource Management.
    5. Richards, Timothy J., 2002. "Dynamic Strategic Interaction: A Synthesis Of Modeling Methods," Western Economics Forum, Western Agricultural Economics Association, vol. 1(01).
    6. Sharifah Sakinah Aidid & Mick Silver, 1999. "Modelling market shares by segments using volatility," Journal of Applied Statistics, Taylor & Francis Journals, vol. 26(5), pages 643-660.
    7. Lambertini, Luca, 2005. "Advertising in a dynamic spatial monopoly," European Journal of Operational Research, Elsevier, vol. 166(2), pages 547-556, October.
    8. Piga, Claudio A. G., 2000. "Competition in a duopoly with sticky price and advertising," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 595-614, May.
    9. Petr Mariel & Cristina López & Karmele Fernández, 2006. "Sales-Advertising Relationship: An Application of Panel Data from the German Automobile Industry," Prague Economic Papers, University of Economics, Prague, vol. 2006(1), pages 29-43.
    10. Matthew Spiegel & Heather Tookes, 2008. "Dynamic Competition, Innovation and Strategic Financing," Yale School of Management Working Papers amz2500, Yale School of Management.
    11. Abhik Roy & Jagmohan Raju, 2011. "The influence of demand factors on dynamic competitive pricing strategy: An empirical study," Marketing Letters, Springer, vol. 22(3), pages 259-281, September.
    12. Fruchter, Gila E., 2001. "A dual control problem and application to marketing," European Journal of Operational Research, Elsevier, vol. 130(1), pages 99-110, April.
    13. Wang, Qinan & Wu, Zhang, 2001. "A duopolistic model of dynamic competitive advertising," European Journal of Operational Research, Elsevier, vol. 128(1), pages 213-226, January.
    14. Requena-Silvente, Francisco & Walker, James, 2007. "Investigating sales and advertising rivalry in the UK multipurpose vehicle market (1995-2002)," Journal of Economics and Business, Elsevier, vol. 59(2), pages 163-180.
    15. Fruchter, Gila E. & Kalish, Shlomo, 1998. "Dynamic promotional budgeting and media allocation," European Journal of Operational Research, Elsevier, vol. 111(1), pages 15-27, November.
    16. Monahan, George E. & Sobel, Matthew J., 1997. "Risk-Sensitive Dynamic Market Share Attraction Games," Games and Economic Behavior, Elsevier, vol. 20(2), pages 149-160, August.
    17. Fruchter, Gila E. & Messinger, Paul R., 2003. "Optimal management of fringe entry over time," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 445-466, December.
    18. Tchumtchoua, Sylvie & Cotterill, Ronald, 2010. "Optimal Brand and Generic Advertising Policies in a Dynamic Differentiated Product Oligopoly," Research Reports 149978, University of Connecticut, Food Marketing Policy Center.
    19. Huang, Jian & Leng, Mingming & Liang, Liping, 2012. "Recent developments in dynamic advertising research," European Journal of Operational Research, Elsevier, vol. 220(3), pages 591-609.

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