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Advertising Dynamics and Competitive Advantage

Author

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  • Ulrich Doraszelski
  • Sarit Markovich

Abstract

Can advertising lead to a sustainable competitive advantage? To answer this question, we propose a dynamic model of advertising competition where firms repeatedly advertise, compete in the product market, and make entry as well as exit decisions. Within this dynamic framework, we study two different models of advertising: In the first model, advertising influences the goodwill consumers extend towards a firm ("goodwill advertising"), whereas in the second model it influences the share of consumers who are aware of the firm ("awareness advertising"). We show that asymmetries may arise and persist under goodwill as well as awareness advertising. The basis for a strategic advantage, however, differs greatly in the two models of advertising. We show that tighter regulation or an outright ban of advertising may have anticompetitive effects and discuss how firms use advertising to deter and accommodate entry and induce exit in a dynamic setting

Suggested Citation

  • Ulrich Doraszelski & Sarit Markovich, 2004. "Advertising Dynamics and Competitive Advantage," Computing in Economics and Finance 2004 61, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:61
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    References listed on IDEAS

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    Cited by:

    1. Ulrich Doraszelski & Kenneth L. Judd, 2012. "Avoiding the curse of dimensionality in dynamic stochastic games," Quantitative Economics, Econometric Society, vol. 3(1), pages 53-93, March.
    2. Toker Doganoglu & Daniel Klapper, 2006. "Goodwill and dynamic advertising strategies," Quantitative Marketing and Economics (QME), Springer, vol. 4(1), pages 5-29, March.
    3. Fabiano Schivardi & Martin Schneider, 2008. "Strategic Experimentation and Disruptive Technological Change," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 386-412, April.
    4. Victor Tremblay & Natsuko Iwasaki & Carol Tremblay, 2005. "The Dynamics of Industry Concentration for U.S. Micro and Macro Brewers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(3), pages 307-324, December.

    More about this item

    Keywords

    advertising; competitive advantage; dynamic games;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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