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Advertising Competition Under Consumer Inertia

Listed author(s):
  • 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)

Registered author(s):

    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.

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    File URL: http://dx.doi.org/10.1287/mksc.22.1.131.12843
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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 22 (2003)
    Issue (Month): 1 (January)
    Pages: 131-144

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    Handle: RePEc:inm:ormksc:v:22:y:2003:i:1:p:131-144
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    1. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 63-81.
    2. Ruth N. Bolton, 1989. "The Relationship Between Market Characteristics and Promotional Price Elasticities," Marketing Science, INFORMS, vol. 8(2), pages 153-169.
    3. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    4. Anil Kaul & Dick R. Wittink, 1995. "Empirical Generalizations About the Impact of Advertising on Price Sensitivity and Price," Marketing Science, INFORMS, vol. 14(3_supplem), pages 151-160.
    5. Hauser, John R & Wernerfelt, Birger, 1990. " An Evaluation Cost Model of Consideration Sets," Journal of Consumer Research, Oxford University Press, vol. 16(4), pages 393-408, March.
    6. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    7. Vinay Kanetkar & Charles B. Weinberg & Doyle L. Weiss, 1992. "Price Sensitivity and Television Advertising Exposures: Some Empirical Findings," Marketing Science, INFORMS, vol. 11(4), pages 359-371.
    8. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
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