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An Empirical Investigation of Advertising Strategies in a Dynamic Duopoly

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Author Info

  • Pradeep K. Chintagunta

    (S. C. Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853)

  • Naufel J. Vilcassim

    (Graduate School of Business Administration, University of Southern California, Los Angeles, California 90089)

Abstract

The equilibrium profit-maximizing advertising policies of firms operating in a dynamic duopoly are derived by linking in a single framework the econometric estimation of the market response function and the technique of differential games that characterizes dynamic competitive behavior. We use the Lanchester model of combat to represent the system dynamics that capture the competitive shifts due to investments in advertising by the two market rivals. We determine the equilibrium advertising levels using both closed- and open-loop policies. We also compare these equilibrium advertising policies for each firm to those obtained using an optimal control theory formulation wherein the advertising spending levels of the rival are assumed to be known. The empirical results obtained by analyzing the advertising rivalry between Coke and Pepsi for the period 1968--1981 under the above three alternative spending policies provide some interesting insights into the nature of competition between these two market rivals. A significant contribution of this paper is to extend the existing literature on advertising competition by integrating theoretical and empirical analyses.

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File URL: http://dx.doi.org/10.1287/mnsc.38.9.1230
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 38 (1992)
Issue (Month): 9 (September)
Pages: 1230-1244

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Handle: RePEc:inm:ormnsc:v:38:y:1992:i:9:p:1230-1244

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

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Cited by:
  1. Lim, Lewis K.S., 2013. "Mapping competitive prediction capability: Construct conceptualization and performance payoffs," Journal of Business Research, Elsevier, vol. 66(9), pages 1576-1586.
  2. Alex Coram, 2008. "The dynamics of resource spending in a competition between political parties: general notes on the Red Queen effect," UMASS Amherst Economics Working Papers 2008-01, University of Massachusetts Amherst, Department of Economics.
  3. 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.
  4. Matthew Spiegel & Heather Tookes, 2008. "Dynamic Competition, Innovation and Strategic Financing," Yale School of Management Working Papers amz2500, Yale School of Management.
  5. Erickson, Gary M., 1995. "Differential game models of advertising competition," European Journal of Operational Research, Elsevier, vol. 83(3), pages 431-438, June.
  6. C. Robert Clark & Ignatius J. Horstmann, 2005. "Advertising and Coordination in Markets with Consumption Scale Effects," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(2), pages 377-401, 06.
  7. Ourania Notta & Kostas Oustapassidis, 2001. "Profitability and Media Advertising in Greek Food Manufacturing Industries," Review of Industrial Organization, Springer, vol. 18(1), pages 115-126, February.
  8. Richards, Timothy J., 2002. "Dynamic Strategic Interaction: A Synthesis Of Modeling Methods," Western Economics Forum, Western Agricultural Economics Association, vol. 1(01).
  9. 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.
  10. Lambertini, Luca, 2005. "Advertising in a dynamic spatial monopoly," European Journal of Operational Research, Elsevier, vol. 166(2), pages 547-556, October.
  11. 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.
  12. 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.
  13. Mesak, Hani I., 1999. "On the generalizability of advertising pulsation monopoly results to an oligopoly," European Journal of Operational Research, Elsevier, vol. 117(3), pages 429-449, September.
  14. Sunil Gupta & Carl F. Mela & Jose M. Vidal-Sanz, 2009. "The value of a "free" customer," Business Economics Working Papers wb092903, Universidad Carlos III, Departamento de Economía de la Empresa.
  15. Toker Doganoglu & Daniel Klapper, 2006. "Goodwill and dynamic advertising strategies," Quantitative Marketing and Economics, Springer, vol. 4(1), pages 5-29, March.
  16. L. Lambertini, 2001. "Production and Advertising in a Dynamic Hotelling Monopoly," Working Papers 395, Dipartimento Scienze Economiche, Universita' di Bologna.
  17. 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.
  18. Kim, Oknam & Hahn, Minhi, 2004. "An advertising model for hierarchically structured markets: application to the automobile industry," Journal of Business Research, Elsevier, vol. 57(8), pages 829-833, August.
  19. Keane, Michael, 1997. "Current Issues in Discrete Choice Modeling," MPRA Paper 52515, University Library of Munich, Germany.
  20. 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.
  21. 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.

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