The Prisoner's Dilemma and the Role of Information in Setting Advertising Budgets

Abstract

This study examines OOw advertising budget setting, framed as a prisoner's dilemma, is affected by information on the competitive situation and characteristics of the decision maker. Hypotheses are tested using experiments in which subjects set advertising budgets. Results indicate that subjects were generally competitive, but also based their strategy selections on what they expected their opponents to do, what their opponents did last time, whether the competitive relationship was expected to continue, market shares, and whether the subject's profit objectives were short-or long-term. Individual differences also played a part in determining strategy selection. IntroductionAdvertising budgeting continues to be a controversial topic. The recent switch in emphasis from advertising to promotion spending has had a major impact on the advertising industry and touched off a spirited debate on the long-run effects of advertising and promotion. Part of this debate suggests that, by using promotion in place of advertising, managers are making less than optimal decisions. Yet, surprisingly little is known about how managers actually set advertising budgets and little attention is paid to this issue. For example, Muncy (1991) found that only nine of 603 articles published in the Journal of Advertising over the preceding 20 years focused on budgets.The payoffs from advertising budgeting decisions (and most other management decisions) depend not only on the decision-maker's own actions, but on the actions of other parties as well. This is particularly true in competitive environments. Advertising, promotion, pricing, and product quality decisions, for example, are all decisions where payoffs are determined, in part, by competitive reaction. This study is designed to contribute to our understanding of some of the important information and decisionmaker characteristics that affect the advertising budget decision. Many studies have addressed what information managers should. use, but little research confronts what they actually use in forming their strategies and how their personalities and experience affect their choices.To explore these questions we begin with a prisoner's dilemma, presented as the management decision task of setting advertising budgets for four regional brands of a mature product in a duopoly, and examine when decision-makers make choices due to information or individual tendencies not incorporated in the standard prisoner's dilemma. Information available for their use includes the profits possible for both firms, the history and duration of the competitive relationship, relative market share, and profit objectives.Findings indicate that when the classic prisoner's dilemma is enriched to represent more closely the complex strategic task of setting advertising budgets, subjects often do not adhere to the normative recommendations of the basic game. Specifically, we found that subjects generally set high advertising budgets and predicted that their opponents would set low advertising budgets more often than th...

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“…Also, consistent with criteria suggested in Gordon, Slade, and Schmitt (1987), our subjects were similar to the population of interest. Corfman and Lehmann (1994) found no substantial differences between executives and students in their prisoner's dilemma study of advertising decisions. Results from the experience curve treatment might be due to demand effects.…”

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