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Advertising budgets in competitive environments

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  • Nolan Miller

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  • Amit Pazgal

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    Abstract

    Firms can approach advertising competition either by setting advertising budgets (as in the percentage of sales method) or target sales levels (as in the objective and task approach). We study firms’ incentives to adopt one or the other posture using a two-stage model of duopolistic competition. In the first stage, each firm chooses to commit either to an advertising budget, letting its sales follow from the market response function, or to a desired sales level, promising to adjust its advertising spending accordingly. In the second stage, firms choose the actual levels of their advertising budget or sales target. When prices are exogenous, we show that, due to strategic effects, if a firm benefits from its rival’s advertising (as when advertising increases awareness of the product category) then setting an advertising budget dominates setting a sales target. On the other hand, if a firm is harmed by its rival’s advertising (as when advertising increases the firm’s share of a fixed market), then committing to a sales level dominates. We extend these results in several directions and show that when firms engage in price competition as well as advertising the nature of advertising and product-market competition interact to determine whether setting an advertising budget or sales target dominates. Copyright Springer Science+Business Media, LLC 2007

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    File URL: http://hdl.handle.net/10.1007/s11129-006-9018-9
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    Bibliographic Info

    Article provided by Springer in its journal Quantitative Marketing and Economics.

    Volume (Year): 5 (2007)
    Issue (Month): 2 (June)
    Pages: 131-161

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    Handle: RePEc:kap:qmktec:v:5:y:2007:i:2:p:131-161

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    Web page: http://www.springerlink.com/link.asp?id=111240

    Related research

    Keywords: Advertising; Pricing; Marketing strategy; Game theory; M37; M31; D43; C72;

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    References

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    1. Ganesh Iyer & David Soberman & J. Miguel Villas-Boas, 2005. "The Targeting of Advertising," Marketing Science, INFORMS, vol. 24(3), pages 461-476, May.
    2. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    3. J. Miguel Villas-Boas, 1993. "Predicting Advertising Pulsing Policies in an Oligopoly: A Model and Empirical Test," Marketing Science, INFORMS, vol. 12(1), pages 88-102.
    4. Chintagunta, Pradeep K & Jain, Dipak C, 1995. "Empirical Analysis of a Dynamic Duopoly Model of Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 109-31, Spring.
    5. Ram C. Rao, 1986. "Estimating Continuous Time Advertising-Sales Models," Marketing Science, INFORMS, vol. 5(2), pages 125-142.
    6. Miller, Nolan H & Pazgal, Amit I, 2001. "The Equivalence of Price and Quantity Competition with Delegation," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 284-301, Summer.
    7. Vijay Mahajan & Eitan Muller, 1986. "Advertising Pulsing Policies for Generating Awareness for New Products," Marketing Science, INFORMS, vol. 5(2), pages 89-106.
    8. Jean-Pierre Dubé & Günter Hitsch & Puneet Manchanda, 2005. "An Empirical Model of Advertising Dynamics," Quantitative Marketing and Economics, Springer, vol. 3(2), pages 107-144, June.
    9. Frank M. Bass & Anand Krishnamoorthy & Ashutosh Prasad & Suresh P. Sethi, 2005. "Generic and Brand Advertising Strategies in a Dynamic Duopoly," Marketing Science, INFORMS, vol. 24(4), pages 556-568, February.
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    Cited by:
    1. Miller, Nolan, 2008. "Outcome Commitments in Third Party Intervention: Theory and Application to U.S. Policy in Iraq," Working Paper Series rwp08-041, Harvard University, John F. Kennedy School of Government.

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