Advertising dynamics and competitive advantage

Abstract

Can advertising lead to a sustainable competitive advantage? To answer this question, we propose a dynamic model of advertising competition where firms repeatedly advertise, compete in the product market, and make entry as well as exit decisions. Within this dynamic framework, we study two different models of advertising: in the first model, advertising influences the goodwill consumers extend toward a firm (“goodwill advertising”), whereas in the second model it influences the share of consumers who are aware of the firm (“awareness advertising”). We show that asymmetries may arise and persist under goodwill as well as awareness advertising. The basis for a strategic advantage, however, differs greatly in the two models of advertising. We show that tighter regulation or an outright ban of advertising may have anticompetitive effects and discuss how firms use advertising to deter and accommodate entry and induce exit in a dynamic setting.