Marketing Mix Theory: Integrating Price and Non-Price Marketing Strategies

Abstract

Intermediate microeconomic analysis traditionally treads lightly in matters of non-price competition. Most of the analysis in Microeconomic Theory, IO, and Managerial Economics texts that is devoted to the topic at both the graduate and undergraduate level is found in chapters on game theory as an application of the prisoner's dilemma, in a paragraph or two summarizing Dorfman and Steiner's profit maximizing rule for advertising, and some general comments on normative aspects of advertising and product development. This sparse treatment is not for lack of suitable conceptual tools for the job. This paper develops a positive analysis of non-price competition in the context of setting price, advertising and product development budgets by firms. In the process, first the relationship between advertising and product development is explored. Then the relationship between these and price is addressed. The analysis is done in the context of a profit-maximizing firm with price, advertising, and product development budgets as decision variables affecting its own and rival's demands. The analysis is built upon the use of sales isoquants, and marketing effort budgets used in deriving the firm's sales expansion path. Finally, a profit maximizing rule for optimal marketing effort expenditures is derived which is shown to be a generalization of the Dorfman-Steiner rule.