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Advertising and endogenous exit in a differentiated duopoly

Published online by Cambridge University Press:  17 August 2016

Andrea Mantovani  and
Giordano Mion
Andrea Mantovani
Affiliation:
CORE, Université Catholique de Louvain and Department of Economics, University of Bologna, Italy
Giordano Mion
Affiliation:
CORE, Université Catholique de Louvain and Department of Economics, University of Bologna, Italy
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Summary

In this paper we consider a two-stage duopoly game where firms first decide whether to invest in advertising and then compete in prices. Advertising has two effects: a market enlargement for both firms and a predatory gain for the investing firm only.

Both symmetric and asymmetric equilibria may arise. The two most interesting cases are a coordination game where both firms investing and non-investing are equilibria, and a chicken game where only one firm invests while the other is possibly driven (endogenously) out of the market. Our results suggest that product differentiation has an ambiguous impact on investment in advertising and that strong product substitutabihty may induce a coordination problem.

Résumé

Résumé

Dans cet article nous considérons un jeu de duopole en deux étapes, dans lequel les entreprises décident d'abord si elles souhaitent investir dans la publicité, puis se concurrencent ensuite en prix. Nous montrons que la publicité a deux effets : d'une part, elle élargie le marché pour les deux entreprises, et d'autre part, elle redirige une partie de la demande vers le produit publicisé.

Nous obtenons, en fonction des paramètres, des équilibres symétrique et asymétriques. Les deux cas les plus intéressants sont un jeu de coordination, où les deux entreprises peuvent simultanément investir ou ne pas investir, et un jeu chicken, où seule l'une des deux entreprises investie tandis que l'autre peut éventuellement sortir (de manière endogène) du marché. Nos résultats suggèrent que la différenciation des produits joue un rôle ambigu sur l'investissement en publicité et qu'une substituabilité forte entre produits peut donner lieu à un problème de coordination.

Keywords

cointégrationco-mouvementco-dépendancecorrélation en sériesC72L11L13M37advertisingproduct differentiationendogenous exitasymmetric equilibriacoordination gamesD64E24J22
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 72 , Issue 1 , 2006 , pp. 19 - 47
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2006 

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Footnotes

*

We thank Rabah Amir, Claude d'Aspremont, Luca Lambertini, Jacques Thisse, Vincent Vannetelbosch, Xavier Wauthy as well as two ananymous referees for useful comments and suggestions. We are also grateful to seminar participants at the University of Bologna, the 2003 SMYE and the 2003 EARIE meeting. Both authors gratefully acknowledge financial support from CORE. The usual disclaimer applies.

**

CORE, Université Catholique de Louvain, 34 Voie du Roman Pays, B-1348, Louvain-la-Neuve, Belgium. Department of Economics, University of Bologna, Strada Maggiore 45,1-40125 Bologna, Italy. mantovani@core.ucl.ac.bemantovan@spbo.unibo.itmion@core.ucl.ac.be

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