Long-run strategic advertisement and short-run Bertrand competition

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

We model and analyze strategic interaction over time in a duopoly. Each period the firms independently and simultaneously take two sequential decisions. First, they decide whether or not to advertise, then they set prices for goods which are imperfect substitutes. Not only the own, but also the other firm's past advertisement efforts affect the current "sales potential" of each firm. How much of this potential materializes as immediate sales, depends on current advertisement decisions. If both firms advertise, "sales potential" turns into demand, otherwise part of it "evaporates" and does not materialize. We determine feasible rewards and equilibria for the limiting average reward criterion. Uniqueness of equilibrium is by no means guaranteed, but Pareto efficiency may serve very well as a refinement criterion for wide ranges of the advertisement costs.
Original languageEnglish
Article number1540014
Pages (from-to)1540014-
Number of pages24
JournalInternational game theory review
Volume17
Issue number2
DOIs
Publication statusPublished - 2015

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Long-run
Sales
Reward
Pareto Efficiency
Substitute
Imperfect
Refinement
Uniqueness
Limiting
Business
Bertrand competition
Short-run
Costs
Interaction
Range of data
Model

Keywords

  • METIS-304924
  • IR-96216

Cite this

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Long-run strategic advertisement and short-run Bertrand competition. / Joosten, Reinoud A.M.G.

In: International game theory review, Vol. 17, No. 2, 1540014, 2015, p. 1540014-.

Research output: Contribution to journalArticleAcademicpeer-review

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AB - We model and analyze strategic interaction over time in a duopoly. Each period the firms independently and simultaneously take two sequential decisions. First, they decide whether or not to advertise, then they set prices for goods which are imperfect substitutes. Not only the own, but also the other firm's past advertisement efforts affect the current "sales potential" of each firm. How much of this potential materializes as immediate sales, depends on current advertisement decisions. If both firms advertise, "sales potential" turns into demand, otherwise part of it "evaporates" and does not materialize. We determine feasible rewards and equilibria for the limiting average reward criterion. Uniqueness of equilibrium is by no means guaranteed, but Pareto efficiency may serve very well as a refinement criterion for wide ranges of the advertisement costs.

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