Pricing and Advertising in a Dynamic Duopoly

Resumen

This paper develops a dynamic duopolistic model of advertising and price competition. The new feature of this paper is that the informative and predatory effect of advertising is considered. Advertising accumulates in a stock of goodwill which deteriorates in time. The optimal advertising strategies differ according to the informative and predatory contents of advertising. There is some implicit cooperation between the two rivals in the case of informative advertising competition, which is the result that has been found in a model where price competition is absent. When advertising is predatory the optimal strategies differ completely from the strategies found in a model without price competition. When both effects of advertising are balanced, strategic interdependence in advertising between firms disappears. If prices are assumed to be constant the solution of the individual profit maximization obviously coincides with the efficient outcome. The assumption of variable prices however takes both competitors away from the cooperative solution. The less differentiated the two products are the heavier the underinvestment in advertising is in spite of the lack of dynamic interaction through advertising variables.