Advertising Competition Under Consumer Inertia

Abstract

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.

Deceptive Advertising with Rational Buyers

“…6 See, e.g., Banerjee and Bandyopadhyay (2003), Becker and Murphy (1993) and Dixit and Norman (1978). 7 See, e.g., Bagwell and Ramey (1988), Bagwell and Ramey (1991), Chu (1992) and Galeotti and Moraga-González (2008). restriction is compelling given the scope of our application and allows to derive simple policy predictions that would be otherwise difficult to obtain.…”

Investigating the Relationship Between Advertising and Pricing in a Channel with Private Label Offering: A Theoretic Model

“…We do so by analyzing the relationship between advertising and prices when manufacturers and retailers are all competing and investing in brand advertising and considering the competitive and informative roles of advertising. 6 The manufacturers and the retailer choose, respectively, the wholesale and retail prices. To analyze the relationships between advertising and pricing when both manufacturers and retailers are competing, we initially consider a simplified distribution channel formed by two competing manufacturers and a single retailer.…”

“…To analyze the relationships between advertising and pricing when both manufacturers and retailers are competing, we initially consider a simplified distribution channel formed by two competing manufacturers and a single retailer. 6 For example, Kroger Company's Manufacturing Division produces more than 3,500 different products in 42 plants. We assume for now that the retailer benefits from a local monopoly in the marketplace, meaning that there is no price and advertising competition from other retailers.…”

A network equilibrium framework for Internet advertising: Models, qualitative analysis, and algorithms

“…The novelty of this paper is the utilization of networks and variational inequality theory for the formulation, analysis, and solution of competitive equilibrium problems faced by firms engaged in Internet-based advertising. Moreover, we view the online marketing arena as competition among N firms, rather than considering a two-firm duopoly as in Banerjee and Bandyopadhyay (2003). This paper is structured as follows.…”