Horizontal cooperative advertising with advertising threshold effects

The advertising threshold effect, which implies that advertising has little effect on sales if the level of advertising is below a certain level, has seldom been addressed in a modeling context. Inspired by the practice of horizontal cooperative advertising (HCA), this paper attempts to investigate the advertising threshold effect in a horizontal context and to explore the value of HCA programs. To investigate the advertising threshold effect in a horizontal context, we develop several advertising and pricing models that involve two horizontally related firms, where the advertising threshold effect is formulated by a two-regime sales function. We first consider the monopoly case and then extend it to a duopoly case. We further consider two HCA programs to explore the value of such programs, in which the firms share advertising expenditures to reduce their advertising cost. The findings include the following: (i) The presence of an advertising threshold can lead to sub-optimal advertising decisions. (ii) If one firm is influenced by the advertising threshold, this influence may be passed to its competitor. (iii) Although cooperative advertising is less cost effective than individual brand advertising, firms can benefit from HCA programs only when the advertising threshold is neither too high nor too low, and the synergy effect of cooperative advertising is not too low.