The equilibrium profit-maximizing advertising policies of firms operating in a dynamic duopoly are derived by linking in a single framework the econometric estimation of the market response function and the technique of differential games that characterizes dynamic competitive behavior. We use the Lanchester model of combat to represent the system dynamics that capture the competitive shifts due to investments in advertising by the two market rivals. We determine the equilibrium advertising levels using both closed- and open-loop policies. We also compare these equilibrium advertising policies for each firm to those obtained using an optimal control theory formulation wherein the advertising spending levels of the rival are assumed to be known. The empirical results obtained by analyzing the advertising rivalry between Coke and Pepsi for the period 1968–1981 under the above three alternative spending policies provide some interesting insights into the nature of competition between these two market rivals. A significant contribution of this paper is to extend the existing literature on advertising competition by integrating theoretical and empirical analyses.

Diagnosing the nature and magnitude of competitive interactions among firms is important for developing effective marketing strategies. In this paper, we formulate a game-theoretic model of firm interaction to analyze the dynamic price and advertising competition among firms in a given product market. Firm (or brand) level demand functions account for the contemporaneous and carry-over effects of these marketing activities, and also allow for the effects of competitor actions. Firms take into consideration the actions of their rivals, as well as their own demand and cost functions (both production and advertising) when determining the profit-maximizing price and advertising levels. Our formulation enables us to quantify not only the direction and magnitude of competitive reactions, but also to identify the underlying form of market conduct that generates the particular pattern of interaction. We specify and estimate a fully structural econometric model for three firms constituting a distinct sub-market within a personal-care product category. We estimate the demand and competitive interaction parameters, as well as the production and advertising cost functions for each firm. We then derive implications for competitive interactions and market structure. Interestingly, we find that while firms seem to compete on advertising, they price cooperatively, thereby enhancing their price-cost margins.

One expectation of the U.S. Federal Communications Commission (FCC) in the early stages of the cellular communications industry was that the presence of two licensees in each market would ensure competition, and thereby result in declining prices over time for both cellular phones (handsets) and phonecalls. However, industry observers have noted recently that although the price of handsets has declined over time, the price of the phonecalls has not. We investigate this interesting pricing issue by modeling the market interaction between the providers of cellular services and also their interaction with customers using a game theoretic framework. A critical assumption in the development of our model is that there exist segments of customers with different valuations, usage levels, and price sensitivities for cellular service. Empirically, we provide support for the existence of two customer segments (viz., Business/Professional and Personal) from both secondary data on industry usage and revenue, and primary data collected from a conjoint analysis study of cellular service customers. From the latter source, we also establish that the Business/Professional customers are more sensitive to prices of phonecalls than the Personal segment. From our analytical model, we characterize the conditions under which penetration and skimming pricing strategies for the handsets are profit-maximizing from the sellers’ standpoint, and derive the corresponding price of phonecalls. One of our main analytical results is that a competitive structure can result in lower prices over time for the handset, but higher prices for the phonecalls, depending on production costs of the handset. We are thus able to provide a theoretical explanation for the observed price patterns for the handset and phonecalls.

Promoting growth by differentiating products is a core tenet of marketing. However, establishing and quantifying marketing’s causal impact on firm growth, while critical, can be difficult. This article examines the effects of a business support intervention in which international professionals from different functional backgrounds (e.g., marketing, consulting) volunteered time to help Ugandan entrepreneurs improve growth. Findings from a multiyear field experiment show that entrepreneurs who were randomly matched with volunteer marketers significantly increased firm growth: on average, monthly sales grew by 51.7%, monthly profits improved by 35.8%, total assets increased by 31.0%, and number of paid employees rose by 23.8%. A linguistic analysis of interactions between volunteers and entrepreneurs indicates that the marketers spent more time on product-related topics than other volunteers. Further mechanism analyses indicate that the marketers helped the entrepreneurs focus on premium products to differentiate in the marketplace. In line with the study’s process evidence, firms with greater market knowledge or resource availability benefited significantly more than their peers when matched with volunteer marketers. As small-scale businesses form the commercial backbone of most emerging markets, their performance and development are critically important. Marketers’ positive impact on these businesses highlights the need for the field’s increased presence in emerging markets.