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Advertising budgets in competitive environments

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  • Nolan Miller
  • Amit Pazgal

Abstract

Firms can approach advertising competition either by setting advertising budgets (as in the percentage of sales method) or target sales levels (as in the objective and task approach). We study firms’ incentives to adopt one or the other posture using a two-stage model of duopolistic competition. In the first stage, each firm chooses to commit either to an advertising budget, letting its sales follow from the market response function, or to a desired sales level, promising to adjust its advertising spending accordingly. In the second stage, firms choose the actual levels of their advertising budget or sales target. When prices are exogenous, we show that, due to strategic effects, if a firm benefits from its rival’s advertising (as when advertising increases awareness of the product category) then setting an advertising budget dominates setting a sales target. On the other hand, if a firm is harmed by its rival’s advertising (as when advertising increases the firm’s share of a fixed market), then committing to a sales level dominates. We extend these results in several directions and show that when firms engage in price competition as well as advertising the nature of advertising and product-market competition interact to determine whether setting an advertising budget or sales target dominates. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Nolan Miller & Amit Pazgal, 2007. "Advertising budgets in competitive environments," Quantitative Marketing and Economics (QME), Springer, vol. 5(2), pages 131-161, June.
    • Handle: RePEc:kap:qmktec:v:5:y:2007:i:2:p:131-161
    DOI: 10.1007/s11129-006-9018-9
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    References listed on IDEAS

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    1. Nolan H. Miller & Amit I. Pazgal, 2006. "Budget or target: the choice between input and output strategies," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 391-415, June.
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    Cited by:

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    More about this item

    Keywords

    Advertising; Pricing; Marketing strategy; Game theory; M37; M31; D43; C72;
    All these keywords.

    JEL classification:

    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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