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Developing an effective advertising strategy is a key component for a firm to be successfully competitive. This paper uses game theory to examine a duopolistic setting in which two firms have the same product. One firm has the higher price and larger market share and both want to compete through advertising. Assuming subgame perfection, we use backward induction to solve the game. We consider how changes in pricing, advertising expenditures and advertising effectiveness affect profit and market shares. We also investigate how changes in the size of the market affect the behavior of all factors. We find that as either firm becomes more effective, the other must respond through pricing and/or advertising. When both firms are highly effective in their advertising, it becomes more beneficial for neither firm to advertise. We also find that while the size of the market will affect the overall advertising expenditures, it will only minimally affect the price per unit and profit per unit to either firm. |
