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Advertising Versus Sales in Demand Creation


  • Hochman Gal

    () (University of California, Berkeley)

  • Hochman Oded

    () (Ben Gurion University)

  • Hochman Eithan

    () (The Hebrew University of Jerusalem)

  • Heiman Amir

    () (The Hebrew University of Jerusalem)

  • Leung PingSun

    () (University of Hawaii at Manoa)


We investigate the dynamics of a firm whose advertisements and sales contribute to its customers’ stock of goodwill. An advertising campaign precedes the firm’s sales when the marginal product of advertisement is sufficiently large (e.g., Amazon Kindle and Apple Macintosh), whereas sales of a new brand of a familiar product may start without advertising (e.g. Crocs shoes). When the firm chooses both advertising and sales policies, the optimal solutions can be divided into two groups typified by low and high demand elasticities. When demand elasticity is low, a massive increase in the quantity sold causes a considerable drop in the product's price. Therefore, the firm prefers to use advertising, rather than excess sales. With high demand elasticity, a massive increase in the quantity sold reduces the price only marginally, thus sales becomes a relatively cheap way to build up the stock of goodwill, compared with advertising.

Suggested Citation

  • Hochman Gal & Hochman Oded & Hochman Eithan & Heiman Amir & Leung PingSun, 2011. "Advertising Versus Sales in Demand Creation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-29, March.
  • Handle: RePEc:bpj:bejeap:v:11:y:2011:i:1:n:18

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    References listed on IDEAS

    1. Gary S. Becker & Kevin M. Murphy, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 941-964.
    2. 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, March.
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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising


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