In this paper, we incorporate the interaction between advertising strategy and pricing strategy. Our results show that firms’
equilibrium advertising strategies depend on
the composition of consumer segments, the potential new users, advertising cost and the negative of competitive advertising. Unlike previous literature, we show that generic advertising may be chosen by the weaker firm to expand the market of switchers, given its competitive advantage in aggressive pricing over the stronger firm.
Furthermore, the positive effect of a firm’s generic advertising on its profit will be weakened by its rival’s brand advertising.
As a consequence, when the advertising cost is not too low, for the equilibrium where one firm conducts generic advertising and the other firm conducts brand advertising to occur, the brand power of the firm that chooses brand advertising cannot be too high.
Managerial Implications
Based on our equilibrium results, we can obtain the following managerial implications
1. The weaker brand may benefit more from market expansion than the stronger brand This paper explicitly incorporates the interaction between advertising and pricing strategies. We show that despite the weaker brand has a smaller loyal base than the rival brand, given its advantage in price
competition, it may pay for the weaker firm to conduct generic advertising, rather than compete directly with its rival in brand advertising. As suggested by Friedman and Friedman (1976), the effect of competitive brand advertising on a firm’s profit may be short-lived. After understanding the
interaction between advertising and pricing
strategies, the weaker firm may well leverage its competitive advantage in pricing when choosing its advertising strategies.
2. Generic advertising and price competition Given generic advertising may intensify the subsequent price competition, the leading firm (the stronger firm) has to trade-off the benefit of increasing the pie and the cost of more intensive price competition. In particular, the more the stronger brand is at disadvantage in price competition, it is more difficult for it to increase the share of the pie via generic advertising.
3. The Advertising Strategy over the product life cycle
We have analyzed how the firms’
equilibrium advertising strategies depend on the size of firms’ loyal base and the size of potential new users. In the earlier stages of the product life cycle, depending on the size of its loyal base relative to its rival’s and other factors, it is not always true that the market leader should expand the total market via generic advertising. Whether generic advertising can be successfully conducted also depends on how many new users it can create. As pointed out by Friedman and Friedman (1976), tea manufacturers may find their real
competition is coffee industry. In the latter stage of the product life cycle, marketers should broaden their advertising outlooks and consider the possibility of inducing category substitution via generic advertising.
To maximize its effectiveness, marketers can consider targeted advertising so that the advertising message can be tailored to a specific segment.
Future Research
In this paper, we focus on firms’
choices between generic advertising and brand advertising and thus do not consider the possibility of conducting both types of advertising. Incorporating the possibilities of multiple advertisements and/or joint generic advertising will produce richer implications.
Also, we only consider one-stage game and therefore the model cannot capture some long-term effects of
advertising on profits. For one thing, if we have a two-stage game, the stronger firm may find it optimal to sacrifice some short-term profit by conducting generic advertising, hoping to accumulate more loyal customers in the next stage via brand advertising. Furthermore, the segments of loyals and switchers are assumed to be exogenously given. In order to have better understanding of the interactions between advertising and pricing strategies, a complete model that incorporates the formation of loyal segments via advertising is suggested for future research.
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Appendix A
A-1Under this condition, given B’s brand advertising, A prefers brand advertising to generic advertising
( )( ) [ ( )] [ ( )] brand advertising, firm A prefer brand advertising to no advertising.
( )( ) [ ( )] [ ( )] generic advertising, firm A prefers branding advertising to no advertising:
( )( ) brand advertising, A prefers generic advertising to no advertising:
( )( ) advertising by firm B, A prefers brand advertising to no advertising:
( )( ) [ ( )] advertising, A prefers brand advertising to no advertising:
( )( ) [ ( )] advertising, A prefers generic advertising to no advertising:
( )
Appendix B
B-1Under this condition, given A’s brand advertising, B prefers brand advertising to generic advertising:
( )( ) [ ( )] [ ( )] brand advertising, firm B prefer brand advertising to no advertising:
( )( ) [ ( )] [ ( )] brand advertising, B prefers generic advertising to no advertising:
( )( ) generic advertising, B prefers brand advertising to no advertising:
( )( ) advertising, B prefers brand advertising to generic advertising:
( )( ) [ ( )] advertising, B prefers brand advertising to no advertising:
( )( ) [ ( )] advertising, B prefers generic advertising to no advertising:
( )