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Persuasive Advertising in Oligopoly: A Linear State Differential Game

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  • R. Cellini
  • L. Lambertini
  • A. Mantovani

Abstract

We investigate a linear state differential oligopoly game with advertising, under either Cournot or Bertrand competition. We show that a unique saddlepoint equilibrium exists in both cases if the marginal cost of advertising is sufficiently low. Then, we prove that Bertrand competition entails more intense advertising than Cournot competition. This is due to the fact that enhancing reservation prices is more relevant to firms when market competition is tougher. Ultimately, this may entail that Cournot outperforms Bertrand when it comes to social welfare.

Suggested Citation

  • R. Cellini & L. Lambertini & A. Mantovani, 2006. "Persuasive Advertising in Oligopoly: A Linear State Differential Game," Working Papers 564, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:564
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    1. Chaim Fershtman & Ehud Kalai, 1993. "Complexity Considerations and Market Behavior," RAND Journal of Economics, The RAND Corporation, pages 224-235.
    2. Stefano DellaVigna & Ulrike Malmendier, 2004. "Contract Design and Self-Control: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 119(2), pages 353-402.
    3. Osborne, Martin J & Rubinstein, Ariel, 1998. "Games with Procedurally Rational Players," American Economic Review, American Economic Association, pages 834-847.
    4. Michele Piccione & Ariel Rubinstein, 2003. "Modeling the Economic Interaction of Agents With Diverse Abilities to Recognize Equilibrium Patterns," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 212-223, March.
    5. Rubinstein, Ariel, 1993. "On Price Recognition and Computational Complexity in a Monopolistic Model," Journal of Political Economy, University of Chicago Press, pages 473-484.
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