On Advertising Games and Spillover in Service Systems

Lei Xu,Jun Shan,Wang Zhigang,Yanzhi Wang

doi:10.1155/2013/260823

Abstract

Motivated by the industry cases, we model the advertising competition between the dominant service provider and small service providers in one service market, where the dominant service provider has a major market share and the other small service providers share the remainder of market equally. Based on this setting, we discuss three advertising game models, that is, cooperative game, Boxed Pig game, and Prisoner’s game, derive the conditions for different advertising games, and characterize their equilibria. To be specific, it is found that the advertising spillover and the number of the small service providers directly determines the advertising game equilibria, while other market parameters, to some extent, can affect the results of the advertising game equilibria. According to our theoretical findings, some management insights and suggestions are given from both the academic and practical perspectives.

Highlights

When you watch TV, listen to radio, read newspapers and magazines, or just surf on the internet, various kinds of exquisite advertisements immediately appear into your eyes
Considering an oligopolistic market with multiple retailers who sell and advertise for a homogenous product, Norman et al [12] find that the advertising intensity is related to the market concentration but make no discussion on the issue how retailers of different size make their optimal advertising decisions in the oligopolistic market. Another stream of the related literature is on the cooperative advertising in the vertical supply chains
We aim to analyze the equilibrium conditions of Boxed Pig game and how it deteriorates into Prisoner’s dilemma game. Suppose that both service providers D and S have the same willingness of cooperative advertising strategy, that is, p = q; in certain condition of the spillover rate θ, the subsidy parameter λ and the advertising effect blI of service provider S, we can derive the following conditions in which only one service provider chooses to offer advertisement, but the other service providers will choose to wait and reap the payoff: θS ≤ θe ≤ θD or MS ≤ Me ≤ MD

Summary

Introduction

When you watch TV, listen to radio, read newspapers and magazines, or just surf on the internet, various kinds of exquisite advertisements immediately appear into your eyes They compete to deliver a claim to customers that “buy me, you deserve!” Undoubtedly, advertising plays an important role in the product sales [1], as well as in enhancing customers’ stickiness to the objective brand [2]. In the homogenization of service market, in order to be differentiated from other competitors, many service providers spend heavily on advertising; hoping to obtain special favor of consumers through constructing brand of company, advertising has been becoming a major strategy of nonprice competitions [3]. In order to obtain the spillover effects of advertisings, the upstream suppliers always induce downstream service providers to invest more on advertising.

Literature Review

Model Developments

Game Model Analysis

Conclusions and Future Research