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Dynamic Advertising Strategies of Competing Durable Good Producers

Author

Listed:
  • Dan Horsky

    (University of Rochester)

  • Karl Mate

    (Arthur D. Little, Inc.)

Abstract

This work develops a diffusion model which incorporates word-of-mouth and advertising effects for two firms introducing competing brands of a new durable product. The competition between the two firms is formulated as a two-player, nonzero sum Markovian game. The firms are assumed to behave noncooperatively in choosing their advertising strategies and the solution concept is a Nash noncooperative equilibrium. Optimal advertising policies for this stochastic closed-loop control problem are obtained via dynamic programming. Our results indicate that both firms will start with high advertising outlays which will get reduced as the number of adopters increases. This is similar to the result obtained previously for a monopolist. Further, we find that there is a significant value in being the first brand to the market, and the greater the intensity of word-of-mouth effects, the greater the value in being first. The first entrant advantage is due to the goodwill generated by its stock of previous adopters. This first entrant advantage can only be overcome if the second entrant enters with a superior brand which is more enthusiastically endorsed by its adopters.

Suggested Citation

  • Dan Horsky & Karl Mate, 1988. "Dynamic Advertising Strategies of Competing Durable Good Producers," Marketing Science, INFORMS, vol. 7(4), pages 356-367.
    • Handle: RePEc:inm:ormksc:v:7:y:1988:i:4:p:356-367
    DOI: 10.1287/mksc.7.4.356
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    Citations

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    Cited by:

    1. Urban, Glen L. & Kalyanaram, Gurumurthy., 1990. "Dynamic effects of the order of entry on market share trial penetration, and repeat purchases for frequently purchased consumer goods," Working papers 3207-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Bing Jing, 2011. "Social Learning and Dynamic Pricing of Durable Goods," Marketing Science, INFORMS, vol. 30(5), pages 851-865, September.
    3. A. Prasad & S. P. Sethi, 2004. "Competitive Advertising Under Uncertainty: A Stochastic Differential Game Approach," Journal of Optimization Theory and Applications, Springer, vol. 123(1), pages 163-185, October.
    4. Teng, Jinn-Tsair & Thompson, Gerald L., 1996. "Optimal strategies for general price-quality decision models of new products with learning production costs," European Journal of Operational Research, Elsevier, vol. 93(3), pages 476-489, September.
    5. Mesak, Hani I. & Calloway, James A., 1995. "A pulsing model of advertising competition: A game theoretic approach, part B -- Empirical application and findings," European Journal of Operational Research, Elsevier, vol. 86(3), pages 422-433, November.
    6. M. Berk Ataman & Carl F. Mela & Harald J. van Heerde, 2008. "Building Brands," Marketing Science, INFORMS, vol. 27(6), pages 1036-1054, 11-12.
    7. Jun, Duk B. & Kim, Seon K. & Park, Yoon S. & Park, Myoung H. & Wilson, Amy R., 2002. "Forecasting telecommunication service subscribers in substitutive and competitive environments," International Journal of Forecasting, Elsevier, vol. 18(4), pages 561-581.
    8. Avagyan, Vardan & Esteban-Bravo, Mercedes & Vidal-Sanz, Jose M., 2016. "Riding successive product diffusion waves. Building a tsunami via upgrade-rebate programs," International Journal of Research in Marketing, Elsevier, vol. 33(4), pages 780-796.
    9. Rajeev Goel, 2007. "On advertising durability and product durability," Applied Economics Letters, Taylor & Francis Journals, vol. 14(1), pages 21-25.
    10. Swami, Sanjeev & Dutta, Arindam, 2010. "Advertising strategies for new product diffusion in emerging markets: Propositions and analysis," European Journal of Operational Research, Elsevier, vol. 204(3), pages 648-661, August.
    11. Erickson, Gary M., 1995. "Differential game models of advertising competition," European Journal of Operational Research, Elsevier, vol. 83(3), pages 431-438, June.
    12. Mesak, Hani I. & Bari, Abdullahel & Babin, Barry J. & Birou, Laura M. & Jurkus, Anthony, 2011. "Optimum advertising policy over time for subscriber service innovations in the presence of service cost learning and customers' disadoption," European Journal of Operational Research, Elsevier, vol. 211(3), pages 642-649, June.
    13. Avagyan, Vardan & Esteban-Bravo, Mercedes & Vidal-Sanz, Jose M., 2014. "Licensing radical product innovations to speed up the diffusion," European Journal of Operational Research, Elsevier, vol. 239(2), pages 542-555.
    14. Barnes, Belinda & Southwell, Darren & Bruce, Sarah & Woodhams, Felicity, 2014. "Additionality, common practice and incentive schemes for the uptake of innovations," Technological Forecasting and Social Change, Elsevier, vol. 89(C), pages 43-61.
    15. Ruiz-Conde, Enar & Wieringa, Jaap E. & Leeflang, Peter S.H., 2014. "Competitive diffusion of new prescription drugs: The role of pharmaceutical marketing investment," Technological Forecasting and Social Change, Elsevier, vol. 88(C), pages 49-63.
    16. Fruchter, Gila E. & Van den Bulte, Christophe, 2011. "Why the Generalized Bass Model leads to odd optimal advertising policies," International Journal of Research in Marketing, Elsevier, vol. 28(3), pages 218-230.
    17. Frank M. Bass & Anand Krishnamoorthy & Ashutosh Prasad & Suresh P. Sethi, 2005. "Generic and Brand Advertising Strategies in a Dynamic Duopoly," Marketing Science, INFORMS, vol. 24(4), pages 556-568, February.

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