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Optimal Timing of Advertising with Demand Spillovers

Author

Listed:
  • Tsuyoshi Toshimitsu

    (Kwansei Gakuin University)

Abstract

We construct a model of a horizontally differentiated duopoly with demand spillovers in which advertising influences the willingness-to-pay of consumers for products and thereby affects not only market share, but also the level of market demand. Furthermore, firms decide the timing as well as the level of advertising. We first derive a subgame perfect Nash equilibrium and Stackelberg equilibria in the advertising competition. Then, using the framework of an endogenous timing decision game with an observable delay (i.e., Hamilton and Slutsky, Games Econ Behavior 2: 29–46, 1990), we consider the optimal timing of advertising. We demonstrate that the optimal timing depends on the degree of demand spillovers and the product substitutability. In particular, if there are sufficient asymmetric demand spillovers between firms, there is a unique Stackelberg equilibrium in the advertising competition, in which the firm providing the product with small (large) demand spillovers chooses to invest in advertising early (late), regardless of the mode of competition.

Suggested Citation

  • Tsuyoshi Toshimitsu, 2017. "Optimal Timing of Advertising with Demand Spillovers," Journal of Industry, Competition and Trade, Springer, vol. 17(1), pages 43-60, March.
    • Handle: RePEc:kap:jincot:v:17:y:2017:i:1:d:10.1007_s10842-016-0219-y
    DOI: 10.1007/s10842-016-0219-y
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    References listed on IDEAS

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    More about this item

    Keywords

    Persuasive advertising; Informative advertising; Demand spillover; Endogenous timing decision model; A natural Stackelberg situation;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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