Abstract
This paper examines the behaviour of two firms competing in a duopoly, where firms can influence demand through use of advertising. The paper simulates the strategic interaction of the two firms based on a game-theoretic Cournot analytical model. The evolution over time of the Nash equilibrium is graphically displayed for a number of different competitive scenarios. The results show that there exist threshold levels of advertising effectiveness at which duopoly behaviour bifurcates, that perfectly cooperative advertising can lead to competitive disadvantage, and that perfectly predatory advertising can lead to stagnation or losses.
Highlights
Advertising has been used as a competitive weapon in some form or other by firms for centuries
In a differentiated Cournot duopoly where advertising shifts the demand function to the right and where both firms advertise and their advertising effectiveness is asymmetric : (a) the firm with higher advertising effectiveness always outperforms the firm with lower advertising effectiveness; (b) there exists a threshold level of advertising effectiveness below which both firms tend to a terminal Cournot equilibrium and above which the firm with higher advertising effectiveness achieves exponential type growth and the firm with lower advertising effectiveness is driven out of the marketplace
This paper considers a strategic decision that faces many firms—whether or not to advertise—and examines it using simulation, a technique from the operational research advertise—and examines it using simulation, a technique from the operational research stable
Summary
Advertising has been used as a competitive weapon in some form or other by firms for centuries. Researchers have explored the dynamics of a Cournot duopoly where advertising alters the slope of the demand function [5]: Refs. [6,7,8] examine closed-form equilibrium solutions to Cournot and Bertrand differentiated duopolies where advertising alters the intercept of the demand function; Ref. [10] examine a Cournot/Bertrand duopoly where advertising alters both the slope and the intercept of the demand function; Ref. The present paper takes a numerical simulation approach to examine the evolution of firm performance over time in a duopoly when advertising alters the intercept of the demand function. Taking a simulation approach allows examination of the behaviour of asymmetric models, the spillover effect of one firm’s advertising on the other, and the evolution of the duopoly beyond equilibria or steady states. The remainder of the paper is organised as follows: section two details the model itself, section three uses simulation to examine a number of competitive scenarios under advertising, and section four concludes
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