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Advertising Dynamics and Competitive Advantage

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  • Ulrich Doraszelski
  • Sarit Markovich
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    Abstract

    Can advertising lead to a sustainable competitive advantage? To answer this question, we propose a dynamic model of advertising competition where firms repeatedly advertise, compete in the product market, and make entry as well as exit decisions. Within this dynamic framework, we study two different models of advertising: In the first model, advertising influences the goodwill consumers extend towards a firm ("goodwill advertising"), whereas in the second model it influences the share of consumers who are aware of the firm ("awareness advertising"). We show that asymmetries may arise and persist under goodwill as well as awareness advertising. The basis for a strategic advantage, however, differs greatly in the two models of advertising. We show that tighter regulation or an outright ban of advertising may have anticompetitive effects and discuss how firms use advertising to deter and accommodate entry and induce exit in a dynamic setting

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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 61.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:sce:scecf4:61

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    Keywords: advertising; competitive advantage; dynamic games;

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    Cited by:
    1. Ulrich Doraszelski & Kenneth L. Judd, 2005. "Avoiding the Curse of Dimensionality in Dynamic Stochastic Games," Harvard Institute of Economic Research Working Papers 2059, Harvard - Institute of Economic Research.
    2. Toker Doganoglu & Daniel Klapper, 2006. "Goodwill and dynamic advertising strategies," Quantitative Marketing and Economics, Springer, vol. 4(1), pages 5-29, March.
    3. Schivardi, Fabiano & Schneider, Martin, 2005. "Strategic Experimentation and Disruptive Technological Change," CEPR Discussion Papers 4925, C.E.P.R. Discussion Papers.
    4. Victor Tremblay & Natsuko Iwasaki & Carol Tremblay, 2005. "The Dynamics of Industry Concentration for U.S. Micro and Macro Brewers," Review of Industrial Organization, Springer, vol. 26(3), pages 307-324, December.

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