Advertising effectiveness and spillover: simulating strategic interaction using advertising

Abstract

This paper reports on a model of advertising-driven competition based on the Cournot analytical duopoly model using a system dynamics approach. The paper discusses the feedback loops that are derived from the analytical equations and shows simulation results for a number of competitive scenarios. The paper identifi es and discusses three different inter-fi rm feedback loops. The scenarios demonstrate that small changes in model parameter values can lead to signifi cant differences in fi rm and industry behaviour; a bifurcation in duopoly behaviour at low and high levels of advertising effectiveness is demonstrated. The simulation model demonstrates that positive spillover (cooperation) reduces the impact of advertising and supports the free-rider hypothesis where advertising is cooperative. The model also demonstrates that negative spillover (predation) increases the impact of advertising when both fi rms advertise. The paper proposes simulation as an alternative to the differential game approach when studying dynamic economic systems.

A Game-Theoretic Model of Strategic Interaction Using Advertising: Simulating the Evolution of the Cournot Nash Equilibrium under Different Competitive Scenarios

“…No stopping rule is applied: the simulations were allowed to continue until firms showed either exponential growth or came to an asymptotic equilibrium. See [35] for a discussion of the feedback loops inherent in the simulation model.…”

On Advertising Games and Spillover in Service Systems

“…Some recent literature has put effort to fill this gap. Brady [10] uses the Cournot game model to discuss the retailers' optimal advertising decisions, and the simulation analysis shows that small changes in model parameters can significantly influence the retailers' advertising behavior. Viscolani [11] suggests that two retailers, producing substituting products in the homogenization market, advertise to influence the product demand and interfere negatively with each other.…”

On Pure-Strategy Nash Equilibria in a Duopolistic Market Share Model

“…Externalities from simple generic advertising may become significant and may modify brand preferences, as market demand becomes more informed (Kinnucan, 1996;Norman et al, 2008;Rutz and Bucklin, 2011;Brahim et al, 2014). The main controversial economic issue is that generic advertising may redistribute market shares, especially in markets that have become strongly differentiated (Chakravarti and Janiszewski, 2004;Brady, 2009;Espinosa and Mariel, 2001;Piga, 1998;Friedman, 1983). The analysis provided in (Espinosa and Mariel, 2001) deals with a duopoly where generic and predatory advertising are present but separately analyzed.…”