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Advertising Competition Under Consumer Inertia

Author

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  • Bibek Banerjee

    () (Indian Institute of Management, Vastrapur, Ahmedabad 380015, India; Department of Marketing, Walker College of Business, Appalachian State University, Boone, North Carolina 28608)

  • Subir Bandyopadhyay

    () (Indiana University Northwest, School of Business and Economics, 3400 Broadway, Gary, Indiana 46408-1197)

Abstract

We construct a multistage game-theoretic model of advertising and price competition in a differentiated products duopoly, in which proportions of consumers exhibit latent inertia in favor of repeat purchase. Advertising simultaneously plays the dual role in reducing such inertia through awareness and enhancing perceived brand value (persuasion). We derive the advertising price cross-effects and provide a theoretical reconciliation of the longstanding debate in the marketing literature regarding the impact of advertising on price sensitivity. We characterize the nature of equilibria under symmetry and show that when a large proportion of consumers exhibit inertial tendencies, then a multiplicity of equilibria exists. Marketing implications and comparative statics are discussed. Numerical simulations for asymmetric firms are presented, wherein we show that advertising is not a useful competitive tool for small firms. However, advertising spending by the large firm provides a halo effect for the average prices in the category, which has a positive externality on the small firm's profits. In the absence of the small brand advertising, larger brand shares encourage firms to allocate higher expenditures on advertising to enhance the perceived value of their brand, which in turn shore up the average prices in the industry from which all firms benefit.

Suggested Citation

  • Bibek Banerjee & Subir Bandyopadhyay, 2003. "Advertising Competition Under Consumer Inertia," Marketing Science, INFORMS, vol. 22(1), pages 131-144, January.
  • Handle: RePEc:inm:ormksc:v:22:y:2003:i:1:p:131-144
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    File URL: http://dx.doi.org/10.1287/mksc.22.1.131.12843
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    References listed on IDEAS

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    Cited by:

    1. Stefan Jonsson & Helena Buhr, 2011. "The Limits of Media Effects: Field Positions and Cultural Change in a Mutual Fund Market," Organization Science, INFORMS, vol. 22(2), pages 464-481, April.
    2. Buehler, Stefan & Halbheer, Daniel, 2012. "Persuading consumers with social attitudes," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 439-450.
    3. Karray Salma & Martín-Herrán Guiomar, 2008. "Investigating the Relationship Between Advertising and Pricing in a Channel with Private Label Offering: A Theoretic Model," Review of Marketing Science, De Gruyter, vol. 6(1), pages 1-39, August.
    4. Sizhong Sun, 2014. "Foreign Entry and Firm Advertising Intensity: Evidence from China," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 45(1), pages 79-97, August.
    5. Zhao, Lan & Nagurney, Anna, 2008. "A network equilibrium framework for Internet advertising: Models, qualitative analysis, and algorithms," European Journal of Operational Research, Elsevier, vol. 187(2), pages 456-472, June.
    6. Karray, Salma, 2013. "Periodicity of pricing and marketing efforts in a distribution channel," European Journal of Operational Research, Elsevier, vol. 228(3), pages 635-647.
    7. Esther Gal-Or & Mordechai Gal-Or, 2005. "Customized Advertising via a Common Media Distributor," Marketing Science, INFORMS, vol. 24(2), pages 241-253, July.
    8. Zhang, Wenqing & Li, Shanling & Zhang, Dan & Hou, Wenhua, 2014. "On the impact of advertising initiatives in supply chains," European Journal of Operational Research, Elsevier, vol. 234(1), pages 99-107.
    9. 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.
    10. Sheng, Li, 2010. "Competing or cooperating to host mega events: A simple model," Economic Modelling, Elsevier, vol. 27(1), pages 375-379, January.
    11. Jia, Junxiu & Zhang, Jiang, 2013. "Dynamic ordering and pricing strategies in a two-tier multi-generation durable goods supply chain," International Journal of Production Economics, Elsevier, vol. 144(1), pages 135-142.

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