Advertising Competition Under Consumer Inertia

Bibek Banerjee () and Subir Bandyopadhyay ()
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Bibek Banerjee: Indian Institute of Management, Vastrapur, Ahmedabad 380015, India; Department of Marketing, Walker College of Business, Appalachian State University, Boone, North Carolina 28608
Subir Bandyopadhyay: Indiana University Northwest, School of Business and Economics, 3400 Broadway, Gary, Indiana 46408-1197

Marketing Science, 2003, vol. 22, issue 1, 131-144

Abstract: We construct a multistage game-theoretic model of advertising and price competition in a differentiated products duopoly, in which proportions of consumers exhibit latent inertia in favor of repeat purchase. Advertising simultaneously plays the dual role in reducing such inertia through awareness and enhancing perceived brand value (persuasion). We derive the advertising price cross-effects and provide a theoretical reconciliation of the longstanding debate in the marketing literature regarding the impact of advertising on price sensitivity. We characterize the nature of equilibria under symmetry and show that when a large proportion of consumers exhibit inertial tendencies, then a multiplicity of equilibria exists. Marketing implications and comparative statics are discussed. Numerical simulations for asymmetric firms are presented, wherein we show that advertising is not a useful competitive tool for small firms. However, advertising spending by the large firm provides a halo effect for the average prices in the category, which has a positive externality on the small firm's profits. In the absence of the small brand advertising, larger brand shares encourage firms to allocate higher expenditures on advertising to enhance the perceived value of their brand, which in turn shore up the average prices in the industry from which all firms benefit.

Keywords: consumer inertia; duopoly; advertising competition; game theory (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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