On deriving and validating comparative statics of a symmetric model of advertising competition

Abstract

In this article, a market share attraction model is estimated using a data set of six manufacturers related to the ready-to-eat cereal industry in the US. For each year of the studied period, the market share of each firm is less than 50%, and these market shares are further apart from one another. In the reported application it is demonstrated, for the first time in the literature, that if model parameters change, all rivals in the industry should adjust their advertising spending in a manner consistent with the symmetric competitive structure for which all market shares are equal. Implications of this important finding are discussed. Scope and purpose Using a market share model of advertising competition and following a game theoretic approach, this study examines analytically and empirically the sensitivity of optimal advertising to changes in model parameters in a setting of symmetric competition. The results presented in the paper suggest that the proposed approach is useful for a firm to ascertain how to adapt its advertising strategy in response to changes in the market to maintain or enhance its position.