Advertising effectiveness and spillover: simulating strategic interaction using advertising

Abstract

This paper reports on a model of advertising-driven competition based on the Cournot analytical duopoly model using a system dynamics approach. The paper discusses the feedback loops that are derived from the analytical equations and shows simulation results for a number of competitive scenarios. The paper identifies and discusses three different inter-firm feedback loops. The scenarios demonstrate that small changes in model parameter values can lead to significant differences in firm and industry behaviour; a bifurcation in duopoly behaviour at low and high levels of advertising effectiveness is demonstrated. The simulation model demonstrates that positive spillover (cooperation) reduces the impact of advertising and supports the free-rider hypothesis where advertising is cooperative. The model also demonstrates that negative spillover (predation) increases the impact of advertising when both firms advertise. The paper proposes simulation as an alternative to the differential game approach when studying dynamic economic systems. Copyright © 2009 John Wiley & Sons, Ltd.