Changing market conditions and advertising strategies: theory and evidence

Abstract

Using a modified continuous Lanchester model of advertising competition and following a game theoretic approach, this paper investigates analytically the sensitivity of optimal advertising to changes in model parameters in the cases of symmetric and semi-symmetric competition. The theoretical results show that non-dominant firms in both market structures behave similarly whereas the dominant firm in the latter structure behaves considerably differently.We estimate a modified Lanchester model using ready-to-eat cereal data. Based on the obtained estimated parameters, we conduct an empirical analysis to assess the robustness of the theoretical estimated results. In the reported application, we demonstrate that when the model parameters change, non-dominant competitors as well as the dominant rival behave in a manner consistent with the theoretical results related to the semi-symmetric competitive structure.