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Advertising in a Differential Game of Spatial Competition

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  • G. Bertuzzi
  • L. Lambertini

Abstract

We investigate a dynamic duopoly game with horizontal product differentiation, to show that the standard approach to spatial competition fails to produce a pure strategy equilibrium in prices when treated in a differential game framework. This holds independently of the shape of the transportation cost function. Then, we introduce an endogenous costs associated with the choice of location and characterize the open-loop and closed-loop equilibria of the model, showing that in the closed-loop case firms invest more in product differentiation and less in advertising, than they do in the open-loop setting. This happens because the gains from product differentiation can be more easily internalised than those associated with advertising.

Suggested Citation

  • G. Bertuzzi & L. Lambertini, 2001. "Advertising in a Differential Game of Spatial Competition," Working Papers 400, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:400
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    References listed on IDEAS

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    1. Neven, Damien J., 1986. "On Hotelling's competition with non-uniform customer distributions," Economics Letters, Elsevier, vol. 21(2), pages 121-126.
    2. Fershtman, Chaim & Kamien, Morton I, 1987. "Dynamic Duopolistic Competition with Sticky Prices," Econometrica, Econometric Society, vol. 55(5), pages 1151-1164, September.
    3. Driskill, Robert A. & McCafferty, Stephen, 1989. "Dynamic duopoly with adjustment costs: A differential game approach," Journal of Economic Theory, Elsevier, vol. 49(2), pages 324-338, December.
    4. Dos Santos Ferreira, Rodolphe & Thisse, Jacques-Francois, 1996. "Horizontal and vertical differentiation: The Launhardt model," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 485-506, June.
    5. Anderson, Simon, 1987. "Spatial competition and price leadership," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 369-398.
    6. Piga, Claudio A. G., 2000. "Competition in a duopoly with sticky price and advertising," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 595-614, May.
    7. Gustav Feichtinger & Richard F. Hartl & Suresh P. Sethi, 1994. "Dynamic Optimal Control Models in Advertising: Recent Developments," Management Science, INFORMS, vol. 40(2), pages 195-226, February.
    8. de Palma, A, et al, 1985. "The Principle of Minimum Differentiation Holds under Sufficient Heterogeneity," Econometrica, Econometric Society, vol. 53(4), pages 767-781, July.
    9. repec:ulb:ulbeco:2013/1759 is not listed on IDEAS
    10. R. Cellini & L. Lambertini, 2000. "Dynamic Oligopoly with Sticky Prices: Closed-Loop,Feedback and Open-Loop Solutions," Working Papers 393, Dipartimento Scienze Economiche, Universita' di Bologna.
    11. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
    12. Claudio A. Piga, 1998. "A Dynamic Model of Advertising and Product Differentiation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(5), pages 509-522, October.
    13. Tabuchi, Takatoshi & Thisse, Jacques-Francois, 1995. "Asymmetric equilibria in spatial competition," International Journal of Industrial Organization, Elsevier, vol. 13(2), pages 213-227.
    14. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
    15. Anderson, Simon P. & Goeree, Jacob K. & Ramer, Roald, 1997. "Location, Location, Location," Journal of Economic Theory, Elsevier, vol. 77(1), pages 102-127, November.
    16. Kohlberg, Elon & Novshek, William, 1982. "Equilibrium in a simple price-location model," Economics Letters, Elsevier, vol. 9(1), pages 7-15.
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