Long-run strategic advertising and short-run Bertrand competition

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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 e¤orts a¤ect 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 (subgame perfect) 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 languageUndefined
Place of PublicationJena, Germany
PublisherMax Planck Gesellschaft
Number of pages25
Publication statusPublished - 2011

Publication series

NamePapers on economics & evolution, ISSN 1430-4716
PublisherMax Planck Gesellschaft

Keywords

  • IR-76745

Cite this

Joosten, R. A. M. G. (2011). Long-run strategic advertising and short-run Bertrand competition. (Papers on economics & evolution, ISSN 1430-4716). Jena, Germany: Max Planck Gesellschaft.