Optimal advertising structure in the presence of a platform owner’s entry

As consumer demand for mobile electronic items (e.g., mobile phones, tablets, or wearables) rises, advertising competition among electronics manufacturers becomes more intense. Moreover, platform owners that offer platforms for electronics manufacturers may use private labels to enter the manufacturers’ market, which further prompts the manufacturers to advertise in response to platform entry. We study how a platform owner’s entry affects advertising and price competition for a strong manufacturer and a weak manufacturer who are differentiated in production costs and advertising efficiency, and reveal the impacts of platform entry and two typical revenue models on the optimal advertising structures of supply chain members in the platform-based market. In the absence of entry, we discover that a relatively larger production cost advantage induces only the strong manufacturer to advertise while a relatively higher advertising efficiency advantage induces only the weak manufacturer to advertise in the wholesale model. In the bundling model, we show that the platform is always beneficial from the advertising of the manufacturer who can generate higher marginal revenue. With entry, our analysis reveals how the production cost of the platform and the differences in advertising efficiency between the manufacturers affect the optimal advertising structure. In particular, we find that as the production cost increases, the platform first prefers only the weak manufacturer to advertise and then both manufacturers to advertise. In practice, our findings have significant managerial implications for platform owners and electronics manufacturers engaged in advertising competition.