Dynamic Advertising Strategies of Competing Durable Good Producers

This work develops a diffusion model which incorporates word-of-mouth and advertising effects for two firms introducing competing brands of a new durable product. The competition between the two firms is formulated as a two-player, nonzero sum Markovian game. The firms are assumed to behave noncooperatively in choosing their advertising strategies and the solution concept is a Nash noncooperative equilibrium. Optimal advertising policies for this stochastic closed-loop control problem are obtained via dynamic programming. Our results indicate that both firms will start with high advertising outlays which will get reduced as the number of adopters increases. This is similar to the result obtained previously for a monopolist. Further, we find that there is a significant value in being the first brand to the market, and the greater the intensity of word-of-mouth effects, the greater the value in being first. The first entrant advantage is due to the goodwill generated by its stock of previous adopters. This first entrant advantage can only be overcome if the second entrant enters with a superior brand which is more enthusiastically endorsed by its adopters.