Advertising Originality Decisions in Competition

Abstract

Originality is a critical determinant of advertising success. However, firms frequently opt to launch unoriginal advertising campaigns. Why would firms opt for unoriginal ads when originality is considered as the “pinnacle”? In this paper, the authors investigate advertising originality decisions for market leaders and followers. They first establish empirically that unoriginal advertising, and more specifically copycat advertising, is a common option across diverse markets even for leading brands. Then, they develop an analytical framework to investigate the optimality of originality decisions. They model creative advertising themes as a “best-shot” type of public good, where a firm’s originality decision is influenced by market structure as well as market growth. The authors then examine whether a firm creates an original ad or opts for an unoriginal one, either by copycatting a competitor or by remaking an existing ad theme. The findings suggest that there is no oversupply of original ads. An original ad can be created by either the leading firm or its follower to boost the valuation of its loyal consumers and profit from higher prices or to attract switchers.

Appendices

Appendix 1

Table 7 Survey items

Appendix 2. Proofs of Propositions

Derivation of Originality Thresholds

Define a^bsas the most effective (the best-shot) ad available prior to Period 1. We first consider the market leader’s ad decision. Specifically, a firm j will create an original ad if and only if:

$$ \underset{a_M^j}{\max}\left\{\mathbbm{E}\left({\varPi}_M^j\left({a}_M^j\right)\right)-k{\left({a}_M^j\right)}^2/2\right\}>\mathbbm{E}\left({\varPi}_M^j\left({a}^{bs}\right)\right), $$

(6)

where $\mathbbm{E}\left({\varPi}_M^j\left({a}^{bs}\right)\right)$for j = {L, F} and M = {LC, FC} given in Table 2. We then solve for the optimal a^j_M for j = {L, F} under two different market scenarios,

$$ {a}_M^{j\ast }=\underset{a_M^j}{\mathrm{argmax}}\left(\mathbbm{E}\left({\varPi}_M^j\left({a}_M^j\right)\right)-k{\left({a}_M^j\right)}^2/2\right\}\Big). $$

(7)

We substitute ${a}_M^{j\ast }$ back to right-hand side of (6), and one can verify that the left-hand side of (6) is increasing ina^bs. Thus, we can use (6) to define the two firms’ originality thresholds under two different market scenarios, respectively.

$$ {\overset{\frown }{a}}_M^j=\left\{a|\underset{a^j}{\max}\left[\mathbbm{E}\left({\varPi}_M^j\left({a}^j\right)\right)-k{\left({a}^j\right)}^2/2\right]=\mathbbm{E}\left({\varPi}_M^j(a)\right)\right\}. $$

(8)

${\overset{\frown }{a}}_M^j$are given in Table 5 for j = {L, F} and M = {LC, FC}.

Proof of Proposition 1

The comparison of the two originality thresholds can be expressed as follows:

$$ {\overset{\frown }{a}}_M^L-{\overset{\frown }{a}}_M^F=\frac{\left[2\alpha -1-\left(1-2\alpha -2\beta \right)\theta \right]v}{2k}. $$

(9)

Let f(θ) = ${\overset{\frown }{a}}_M^L$ − ${\overset{\frown }{a}}_M^F$ and differentiate w.r.t. θ, we have:

$$ f'\left(\theta \right)=\frac{\left(2\alpha +2\beta -1\right)v}{2k}. $$

(10)

We also solve for f(θ) = 0, where the critical value is given as ${\theta}_1=\frac{1-2\alpha }{2\alpha +2\beta -1}$.

When α > 1/2, we haveα + β > 1/2, suggesting that f’(θ) > 0. Hence, f(θ) is monotonically increasing in θ; α > 1/2 also suggests that θ₁ < 0. Therefore, f(θ ≥ 0) > f(θ₁) = 0. That is, for any positive value of θ, the market leader always has a higher originality threshold than firm F.

When 1/2 − β < α < 1/2, we haveα + β > 1/2 suggesting that f’(θ) > 0. Hence, f(θ) is still monotonically increasing in θ and1 − 2α > 0, which means that θ₁ > 0. Therefore, f(θ) > 0 for any positive value of θ > θ₁ , suggesting that the market leader has a higher originality threshold, and vice versa for 0 < θ< θ₁.

When α < 1/2 − β, we haveα + β < 1/2 suggesting that f’(θ) < 0. Hence, f(θ) is now monotonically decreasing in θ. It also suggests that1 − 2α > 0 which means that θ₁ < 0. Therefore, for any positive value of θ> θ₁ , f(θ) < 0, suggesting that the market leader always has a lower originality threshold than firm F.

Proof of Proposition 2

We first write down the mathematical results for Proposition 2, which are as follows:

• (a) When a^bs > max{${\overset{\frown }{a}}_M^L$,${\overset{\frown }{a}}_M^F$}, neither firm will originate.

• (b) When min{ ${\overset{\frown }{a}}_M^L$ , ${\overset{\frown }{a}}_M^F$ } < a ^bs max{ ${\overset{\frown }{a}}_M^L$ , ${\overset{\frown }{a}}_M^F$ }, and ${\overset{\frown }{a}}_M^L$ > ${\overset{\frown }{a}}_M^F$ ,only firm L will originate.

• (c) When min{${\overset{\frown }{a}}_M^L$,${\overset{\frown }{a}}_M^F$} < a^bs < max{${\overset{\frown }{a}}_M^L$,${\overset{\frown }{a}}_M^F$}, and${\overset{\frown }{a}}_M^L$<${\overset{\frown }{a}}_M^F$,only firm F will originate.

• (d) When a^bs < min{${\overset{\frown }{a}}_M^L$,${\overset{\frown }{a}}_M^F$}, only one firm will originate.

• 1. The result where a^bs is greater than ${\overset{\frown }{a}}_M^L$and ${\overset{\frown }{a}}_M^F$ comes directly from its definition. Neither firm has the incentive to create its own ad as the best-shot ad theme is effective enough.

• 2. When a^bs lies between the ${\overset{\frown }{a}}_M^L$ and ${\overset{\frown }{a}}_M^F$, we assume that ${\overset{\frown }{a}}_M^L$ > ${\overset{\frown }{a}}_M^F$, and hence, we have ${\overset{\frown }{a}}_M^F$ < a^bs < ${\overset{\frown }{a}}_M^L$. This inequality suggests that the best-shot ad theme is good enough for firm F but not for firm L. Firm F has no incentive to originate, and it only chooses the best available ad theme. For firm L, a^bs > ${\overset{\frown }{a}}_M^L$ suggests that it has the incentive to originate, even if firm F eventually copycats its creative. For illustration purposes, we pick one sub-scenario from where ${\overset{\frown }{a}}_M^L$ > ${\overset{\frown }{a}}_M^F$. This corresponds to Proposition 1, Part 1, where α > 1/2.

We can then compute the two firms’ expected profits to form the following payoff matrix:

		Firm L
		Originate	Not originate
Firm F	Originate	{${\pi}_O^L\left({a}^{L\ast },{a}^{F\ast}\right)$, ${\pi}_O^F\left({a}^{L\ast },{a}^{F\ast}\right)$}	{${\pi}_{NO}^L\left({a}^{F\ast}\right)$, ${\pi}_O^F\left({a}^{F\ast}\right)$}
	Not originate	{${\pi}_O^L\left({a}^{L\ast}\right)$, ${\pi}_{NO}^F\left({a}^{L\ast}\right)$}	{${\pi}_{NO}^L\left({a}^{bs}\right)$, ${\pi}_{NO}^F\left({a}^{bs}\right)$}

where ${\pi}_O^j$=$\mathbbm{E}\left({\varPi}_M^j\left({a}^{j\ast}\right)\right)-k{\left({a}^{j\ast}\right)}^2/2$, and ${\pi}_{NO}^j$ = ${\varPi}_M^j\left(\max \left\{{a}^{bs},{a}^{-j\ast}\right\}\right)$, where a^−j∗ is firm j’s competitor’s creative ad.

By the definition of the originality threshold, when ${\overset{\frown }{a}}_M^F$ < a^bs < ${\overset{\frown }{a}}_M^L$, we have${\pi}_{NO}^F\left({a}^{bs}\right)$ > ${\varPi}_O^F\left({a}^{F\ast}\right)$, and ${\pi}_O^L\left({a}^{L\ast}\right)$ > ${\pi}_{NO}^L\left({a}^{bs}\right)$. Firm L is strictly better off by originating its own ad instead of using the best-shot theme a^bs. On the other hand, Firm L’s creative decision leads to a^L* > a^bs. Since ${\pi}_{NO}^F$ is monotonically increasing in a, we have ${\pi}_{NO}^F\left({a}^{L\ast}\right)>{\pi}_{NO}^F\left({a}^{bs}\right)$. That is, firm F is strictly better off by copycatting a^L*. Consequently, neither firm wants to deviate from the outcome {originate, not originate}. Hence, {originate, not originate} constitutes a Nash equilibrium.

• 1. The proof for the cases where ${\overset{\frown }{a}}_M^L$ < ${\overset{\frown }{a}}_M^F$is the same. {not originate, originate} constitutes a Nash equilibrium.

• 2. Finally, when a^bs < min{${\overset{\frown }{a}}_M^L$, ${\overset{\frown }{a}}_M^F$}, we first assume that ${\overset{\frown }{a}}_M^L$ > ${\overset{\frown }{a}}_M^F$, and hence, a^bs < ${\overset{\frown }{a}}_M^F$ < ${\overset{\frown }{a}}_M^L$. Either firm has motivations to originate. Firm L is strictly better off by originating its own ad instead of using the best-shot theme a^bs${\pi}_O^L\left({a}^{L\ast}\right)$ > ${\pi}_{NO}^L\left({a}^{bs}\right)$. On the other hand, firm L’s creative decision leads to a^L* > a^bs. Since ${\pi}_{NO}^F$ is monotonically increasing in a, ${\pi}_{NO}^F\left({a}^{L\ast}\right)>{\pi}_{NO}^F\left({a}^{bs}\right)$. That is, firm F is strictly better off by copycatting a^L*.

Will firm F also originates given that firm L is originating? The answer is no. Since ${\overset{\frown }{a}}_M^L$ > ${\overset{\frown }{a}}_M^F$, we have a^L* > a^F*. Thus, for firm F, if it originates, it ends up with a less effective ad, and at the same time, incurs non-negative creative costs. Hence, firm F will not originate. Consequently, neither firm wants to deviate from the outcome {originate, not originate}, which constitutes a Nash equilibrium.

We now examine the case where ${\overset{\frown }{a}}_M^L$ < ${\overset{\frown }{a}}_M^F$, and hence, a^bs < ${\overset{\frown }{a}}_M^L$ < ${\overset{\frown }{a}}_M^F$. In this case, firm F is strictly better off by originating because ${\pi}_O^F\left({a}^{F\ast}\right)$ > ${\pi}_{NO}^F\left({a}^{bs}\right)$.

Will firm L deviates to “originate” given that firm F is originating? The answer is also no. To see this, when firm L copycatsa^F∗, its profit is given by

$$ {\pi}_{NO}^L\left({a}^{F\ast}\right)=\frac{\left(\alpha +\alpha \theta +\beta \theta \right)\left(3\alpha +3\alpha \theta +3\beta \theta -2-2\theta \right){v}^2}{2k}. $$

(11)

When firm L originates, its profit is given by.

$$ {\pi}_O^L\left({a}^{L\ast}\right)=\frac{\left(\alpha +\alpha \theta +\beta \theta \right)\left(3\alpha +3\alpha \theta +3\beta \theta -2-2\theta \right){v}^2}{2k}. $$

(12)

By Proposition 1, a^bs < min{${\overset{\frown }{a}}_M^L$, ${\overset{\frown }{a}}_M^F$}, this suggests that $\theta >\frac{1-2\alpha }{2\alpha +2\beta -1}$, for which the comparison of (11) and (12) ${\pi}_O^L\left({a}^{L\ast}\right)-{\pi}_{NO}^L\left({a}^{F\ast}\right)$ < 0. Thus, firm L will not originate, and {not originate, originate} constitutes an equilibrium. To sum up, at most one firm originates.