Competitive Advertising Strategies and Market-Size Dynamics: A Research Note on Theory and Evidence

This paper analyzes competing firms' advertising strategies in markets characterized by dynamic market sizes. For new product innovations, a large literature has been developed on the basis of the celebrated Bass diffusion process, which captures what we call market-size dynamics. However, in spite of the significant literature incorporating competitiveness into the Bass model, few if any analytical results have been obtained, especially those with normative implications. On the other hand, important theoretical and empirical insights have recently been obtained using the famous Lanchester warfare model of competition, in which market-share dynamics are governed by advertising activities for mature products whose market sizes are typically fixed or stable. Our paper seeks to address the issue of optimal advertising strategies incorporating both market-share dynamics and market-size dynamics. In doing so, we seek to take advantage of the theoretical and normative insights currently available in the Lanchester formulation for mature products to obtain normative, analytical results on competitive advertising strategies for new product innovations whose markets evolve around the Bass process. We first obtain analytical solutions to the problem at hand and offer theoretical implications for competitive advertising on the Bass diffusion model. The model's parameters are then estimated using a set of data on sales and advertising expenditures of Polaroid Corp. and Eastman Kodak Co. in instant photography during the 1976-1985 period; optimal trajectories for the firms' advertising spending are then calculated, and other marketing and managerial implications of optimal advertising strategies are explored.