A Model of Optimal Advertising Expenditure in a Dynamic Duopoly.

Abstract

This paper develops a dynamic model of oligopolistic advertising competition. The model is general enough to include predatory advertising and informative advertising as particular cases. Our analysis is conducted in a differential game framework and we compare the open-loop and Markov feedback equilibria to the efficient outcome. For the informative advertising competition game we find that advertising levels are closer to the collusive outcomes in a feedback equilibrium. In the case of predatory advertising, expenditures are inefficiently high in a feedback equilibrium and the open-loop solution is more efficient. Finally, when the informative and predatory contents of advertising messages are balanced, the cooperative outcome can be implemented with both open-loop and feedback strategies. In an empirical application for the German automobile industry we estimate the informative and predatory contents of advertising, compute the optimal strategies and compare them to actual advertising levels.