Advertising Dynamics and Competitive Advantage
AbstractCan 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
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 61.
Date of creation: 11 Aug 2004
Date of revision:
advertising; competitive advantage; dynamic games;
Find related papers by JEL classification:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-16 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chaim Fershtman & Vijay Mahajan & Eitan Muller, 1990. "Market Share Pioneering Advantage: A Theoretical Approach," Management Science, INFORMS, vol. 36(8), pages 900-918, August.
- Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
- Bagwell, Kyle & Ramey, Garey, 1994.
"Advertising and Coordination,"
Review of Economic Studies,
Wiley Blackwell, vol. 61(1), pages 153-72, January.
- Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, November.
- Sass, Tim R & Saurman, David S, 1995. "Advertising Restrictions and Concentration: The Case of Malt Beverages," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 66-81, February.
- Stegeman, Mark, 1991. "Advertising in Competitive Markets," American Economic Review, American Economic Association, vol. 81(1), pages 210-23, March.
- Fershtman, Chaim, 1984. "Goodwill and Market Shares in Oligopoly," Economica, London School of Economics and Political Science, vol. 51(23), pages 271-81, August.
- Shaked, Avner & Sutton, John, 1987. "Product Differentiation and Industrial Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 131-46, December.
- Milgrom, Paul & Roberts, John, 1986.
"Price and Advertising Signals of Product Quality,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 796-821, August.
- Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
- David Besanko & Ulrich Doraszelski, 2002.
"Capacity Dynamics and Endogenous Asymmetries in Firm Size,"
Computing in Economics and Finance 2002
196, Society for Computational Economics.
- David Besanko & Ulrich Doraszelski, 2004. "Capacity Dynamics and Endogenous Asymmetries in Firm Size," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 23-49, Spring.
- Stigler, George J & Becker, Gary S, 1977. "De Gustibus Non Est Disputandum," American Economic Review, American Economic Association, vol. 67(2), pages 76-90, March.
- Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
- Bagwell, Kyle & Ramey, Garey, 1994.
"Coordination Economies, Advertising, and Search Behavior in Retail Markets,"
American Economic Review,
American Economic Association, vol. 84(3), pages 498-517, June.
- Bagwell, K. & Ramey, G., 1992. "Coordination Economies, advertising and Search Behavior in Retail Markets," Working Papers e-92-1, Hoover Institution, Stanford University.
- Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
- Grossman, Gene M & Shapiro, Carl, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 63-81, January.
- Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
- Pradeep K. Chintagunta, 1993. "Investigating the Sensitivity of Equilibrium Profits to Advertising Dynamics and Competitive Effects," Management Science, INFORMS, vol. 39(9), pages 1146-1162, September.
- Slade, Margaret E, 1995. "Product Rivalry with Multiple Strategic Weapons: An Analysis of Price and Advertising Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 445-76, Fall.
- Volker Nocke, 1998. "Underinvestment and Market Structure," STICERD - Economics of Industry Papers 22, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Caplin, Andrew & Nalebuff, Barry, 1991.
"Aggregation and Imperfect Competition: On the Existence of Equilibrium,"
Econometric Society, vol. 59(1), pages 25-59, January.
- Caplin, A. & Nalebuff, B., 1989. "Aggregation And Imperfect Competition: On The Existence Of Equilibrium," Discussion Papers 1989_30, Columbia University, Department of Economics.
- Andrew Caplin & Barry Nalebuff, 1990. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Cowles Foundation Discussion Papers 937, Cowles Foundation for Research in Economics, Yale University.
- Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
- Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
- Marcel Boyer & Michel Moreaux, 1999.
"Strategic Underinvestment in Informative Advertising: The Cases of Substitutes and Complements,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 32(3), pages 654-672, May.
- Boyer, M. & Moreaux, M., 1998. "Strategic Underinvestment in Informative Advertising: the Cases of Subsitutes and Complements," Papers 98.502, Toulouse - GREMAQ.
- Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-86, May.
- Fudenberg, Drew & Tirole, Jean, 1983. "Capital as a commitment: Strategic investment to deter mobility," Journal of Economic Theory, Elsevier, vol. 31(2), pages 227-250, December.
- Kamel Jedidi & Carl F. Mela & Sunil Gupta, 1999. "Managing Advertising and Promotion for Long-Run Profitability," Marketing Science, INFORMS, vol. 18(1), pages 1-22.
- Kihlstrom, Richard E & Riordan, Michael H, 1984. "Advertising as a Signal," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 427-50, June.
- Schmalensee, Richard, 1983. "Advertising and Entry Deterrence: An Exploratory Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 636-53, August.
- Fabiano Schivardi & Martin Schneider, 2008.
"Strategic Experimentation and Disruptive Technological Change,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 386-412, April.
- Schivardi, Fabiano & Schneider, Martin, 2005. "Strategic Experimentation and Disruptive Technological Change," CEPR Discussion Papers 4925, C.E.P.R. Discussion Papers.
- Ulrich Doraszelski & Kenneth L. Judd, 2005.
"Avoiding the Curse of Dimensionality in Dynamic Stochastic Games,"
NBER Technical Working Papers
0304, National Bureau of Economic Research, Inc.
- Ulrich Doraszelski & Kenneth L. Judd, 2012. "Avoiding the curse of dimensionality in dynamic stochastic games," Quantitative Economics, Econometric Society, vol. 3(1), pages 53-93, 03.
- 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.
- Toker Doganoglu & Daniel Klapper, 2006. "Goodwill and dynamic advertising strategies," Quantitative Marketing and Economics, Springer, vol. 4(1), pages 5-29, March.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.