Abstract
To the lay person, marketing is advertising. In reality, it comprises all the activities of a firm that influence its demand. This includes advertising, of course, but it also includes product design, pricing, distribution, and sales promotion. Thus, marketing decisions arise right at the inception of the firm, just as its business model is being determined. This chapter reviews how game theory has been used to model firms' marketing decisions when they interact with strategic consumers, collaborators, and competitors.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
An exception is when price signals an underlying strategic variable such as product quality.
- 2.
With different marginal costs for the two firms, escalation stops at the higher marginal cost.
- 3.
The exception may be models where price signals a demand-raising attribute such as “product quality.”
- 4.
- 5.
- 6.
\( {F_2}(p) \) is precisely the conditional distribution of \( {F_1}(p) \) given \( \{p<R\} \).
- 7.
By horizontal differentiation I mean firms differentiate on a product attribute on which consumers have different preferences—different “ideal points” – at equal prices. Simplest examples revolve around “taste” differences – some people like sweet coffee, others not so sweet. More generally, preference heterogeneity may be induced by correlations between two or more attributes. For example, at equal prices, some people may prefer a small car to a large car, and others vice-versa, because car size is correlated with fuel economy. Vertical differentiation involves attributes like “quality” where all consumers’ preferences increase in the same direction – for example, all would prefer a higher quality product to a lower quality product, ceteris paribus.
- 8.
As noted earlier, this order accords with reality, product decisions being harder to change than prices.
- 9.
The remaining segment, (1−\( {\alpha_1} \)) (1−α2), reached by neither segment is assumed to be irrelevant by assuming that advertising-based awareness is necessary for product purchase.
- 10.
There is also a symmetric mixed strategy equilibrium.
- 11.
Uninformative advertising, in contrast to demand-enhancing advertising, has no direct effects on demand: \( {D_A}=0 \).
References
Anderson, S. P., & Renault, R. (1999). Pricing, product diversity, and search costs: A Bertrand-Chamberlin-diamond model. The RAND Journal of Economics, 30(4), 719–735.
Bagwell, K. (2007). The economic analysis of advertising. In M. Armstrong & R. Porter (Eds.), Handbook of industrial organization (Vol. 3, pp. 1701–1844). Amsterdam: Elsevier.
Bagwell, K., & Riordan, M. H. (1991). High and declining prices signal product quality. The American Economic Review, 91(1), 224–239.
Baye, M. R., & Morgan, J. (2001). Information gatekeepers on the internet and the competitiveness of homogeneous product markets. The American Economic Review, 91(3), 454–474.
Baye, M. R., Morgan, J., & Scholten, P. (2006). Information, search, and price dispersion. In T. Hendershott (Ed.), Handbook of economics and information systems. Amsterdam: Elsevier.
Bertrand, J. (1883). Théorie des richesses: revue de ‘Théorie mathématique de la richesse sociale’ par Léon Walras et ‘Recherches sur les principes mathématiques de la richesse’ par Augustin Cournot. J. des Savants, 499–508.
Bester, H., & Petrakis, E. (1995). Price competition and advertising in oligopoly. European Economic Review, 39(6), 1075–1088.
Bonanno, G., & Vickers, J. (1988). Vertical separation. The Journal of Industrial Economics, 36(3), 257–265.
Brown, J., Hossain, T., & Morgan, J. (2010). Shrouded attributes and information suppression: Evidence from the field. Quarterly Journal of Economics, 125(2), 859–876.
Chen, Y. (1997). Paying customers to switch. Journal of Economics and Management Strategy, 6(4), 877–897.
Chiovenanu, I., & Zhou J. (2011). Price competition with consumer confusion. Working paper, New York University.
Choi, J. P. (1991). Dynamic R&D competition under ‘Hazard Rate’ uncertainty. The RAND Journal of Economics, 22(4), 596–610.
Chu, W., & Chu, W. (1994). Signaling quality by selling through a reputable retailer: An example of renting the reputation of another agent. Marketing Science, 13(2), 177–189.
Coughlan, A. T., & Wernerfelt, B. (1989). On credible delegation by oligopolists: A discussion of distribution channel management. Management Science, 35(2), 226–239.
D’Aspremont, C., Jaskold Gabszewicz, J., & Thisse, J.-F. (1979). On hotelling’s ‘Stability in Competition’. Econometrica, 47(5), 1145–1150.
Diamond, P. (1971). A model of price adjustment. Journal of Economic Theory, 3, 156–168.
Downs, A. (1957). An economic theory of democracy. New York: Harper.
Ellison, G. (2005). A model of add-on pricing. Quarterly Journal of Economics, 120, 585–637.
Ellison, G., & Ellison, S. F. (2009). Search, obfuscation, and price elasticities on the internet. Econometrica, 77(2), 427–452.
Estelami, H. (1997). Consumer perceptions of multi-dimensional prices. Advances in Consumer Research, 24, 392–399.
Fudenberg, D., & Tirole, J. (2000). Customer poaching and brand switching. The RAND Journal of Economics, 31(4), 634–657.
Fudenberg, D., & Villas-Boas, J. M. (2006). Behavior-based price discrimination and customer recognition. In T. Hendershott (Ed.), Handbooks in information systems (Vol. 1). Bingley, UK: Emerald.
Gabaix, X., & Laibson, D. (2006). Shrouded attributes, consumer myopia, and information suppression in competitive markets. The Quarterly Journal of Economics, 121(2), 505–540.
Gerstner, E. (1985). Do higher prices signal higher quality. Journal of Marketing Research, 22(2), 209–215.
Hauser, J. R. (1988). Note—Competitive price and positioning strategies. Marketing Science, 7(1), 76–91.
Hauser, J. R., & Wernerfelt, B. (1990). An evaluation cost model of consideration sets. Journal of Consumer Research, 16(4), 393–408.
Horstmann, I., & MacDonald, G. (2003). Is advertising a signal of product quality? Evidence from the compact disc player market, 1983–1992. International Journal of Industrial Organization, 21(3), 317–345.
Hossain, T., & Morgan J. (2006). ... Plus shipping and handling: revenue (non) equivalence in field experiments on eBay. Advances in Economic Analysis & Policy, 6(2).
Hotelling, H. (1929). Stability in competition. The Economic Journal, 39(153), 41–57.
Iyer, G. (1998). Coordinating channels and price and nonprice competition. Marketing Science, 17(4), 338–355.
Iyer, G., Soberman, D., & Miguel Villas-Boas, J. (2005). The targeting of advertising. Marketing Science, 24(3), 461–476.
Jeuland, A. P., & Shugan, S. M. (1983). Managing channel profits. Marketing Science, 2(3), 239–272.
Katz, M. L. (1991). Game-playing agents: Unobservable contracts as precommitments. The RAND Journal of Economics, 22(3), 307–328.
Kohn, M. G., & Shavell, S. (1974). The theory of search. Journal of Economic Theory, 9(2), 93–123.
Kuksov, D. (2004). Buyer search costs and endogenous product design. Marketing Science, 23(4), 490–499.
Kuksov, D., & Miguel Villas-Boas, J. (2010). When more alternatives lead to less choice. Marketing Science, 29(3), 507–524.
Lal, R., & Matutes, C. (1994). Retail pricing and advertising strategies. Journal of Business, 67(3), 345–370.
Lal, R., & Sarvary, M. (1999). When and how is the internet likely to decrease price competition? Marketing Science, 18(4), 485–503.
Lauga, D. O., & Ofek, E. (2011). Product positioning in a two-dimensional vertical differentiation model: The role of quality costs. Marketing Science, 30(5), 903–923.
Lynch, J. G., Jr., & Ariely, D. (2000). Wine online: Search costs affect competition on price, quality, and distribution. Marketing Science, 19(1), 83–103.
MacMinn, R. D. (1980). Search and market equilibrium. Journal of Political Economy, 88(2), 308–327.
McAfee, R. P., & Schwartz, M. (1994). Opportunism in multilateral vertical contracting: Nondiscrimination, exclusivity, and uniformity. The American Economic Review, 84(1), 210–230.
McGure, T. W., & Staelin, R. (1983). An industry equilibrium analysis of downstream vertical integration. Marketing Science, 27(1), 115–130.
Mehta, N., et al. (2003). Price uncertainty and consumer search: A structural model of consideration set formation. Marketing Science, 22(1), 58–84.
Mela, C. L., Roos, J., & Deng, Y. (2013). A keyword history of marketing science. Marketing Science, 32 (1), 8–18.
Milgrom, P., & Roberts, J. (1986). Price and advertising signals of product quality. Journal of Political Economy, 94(4), 796–821.
Moorthy, K. S. (1987). Managing channel profits: Comment. Marketing Science, 6(4), 375–379.
Moorthy, K. S. (1988). Strategic decentralization in channels. Marketing Science, 7(4), 335–355.
Moorthy, S. (2012). Can Brand Extension Signal Product Quality? Marketing Science, (forthcoming).
Moorthy, K. S., & Srinivasan, K. (1995). Signaling quality with a money-back guarantee: The role of transaction costs. Marketing Science, 14(4), 442–466.
Moorthy, S., & Winter, R. A. (2006). Price-matching guarantees. The RAND Journal of Economics, 37(2), 449–465.
Morwitz, V. G., Greenleaf, E. A., & Johnson, E. J. (1998). Divide and prosper: Consumers’ reactions to partitioned prices. Journal of Marketing Research, 35(4), 453–463.
Narasimhan, C. (1988). Competitive promotional strategies. Journal of Business, 61(4), 427–449.
Nelson, P. (1970). Information and consumer behavior. Journal of Political Economy, 78(2), 311–329.
Nelson, P. (1974). Advertising as information. Journal of Political Economy, 82(4), 729–754.
Neven, D., & Thisse, J.-F. (1990). Quality and variety competition. In J. J. Gabszewicz, J.-F. Richard & L. Wolsey (Eds.), Economic Decision Making: Games, Econometrics and Optimisation (Essays in Honor of Jacques Dreze). Amsterdam: Elsevier.
Piccione, M., & Spiegler, R. (2012). Price competition under limited comparability. Quarterly Journal of Economics, 127(1), 97–135.
Raju, J. S., Srinivasan, V., & Lal, R. (1990). The effects of brand loyalty on competitive price promotional strategies. Management Science, 36(3), 276–304.
Reinganum, J. F. (1979). A simple model of equilibrium price dispersion. Journal of Political Economy, 87(4), 851–858.
Rosenthal, R. W. (1980). A model in which and increase in the number of sellers leads to a higher price. Econometrica, 48(6), 1575–1579.
Rothschild, M. (1973). Models of market organization with imperfection information: A survey. Journal of Political Economy, 81(6), 1283–1308.
Shaffer, G., & Zhang, Z. J. (2000). Preference-based price discrimination in markets with switching costs. Journal of Economics and Management Strategy, 9(3), 397–424.
Shaked, A., & Sutton, J. (1982). Relaxing price competition through product differentiation. Review of Economic Studies, 49(1), 3–13.
Shilony, Y. (1977). Mixed pricing in oligopoly. Journal of Economic Theory, 14, 373–388.
Shin, J., & Sudhir, K. (2010). A customer management dilemma: When is it profitable to reward one’s own customers? Marketing Science, 29(4), 671–689.
Simester, D. (1995). Signalling price image using advertised prices. Marketing Science, 14(2), 166–188.
Spengler, J. J. (1950). Vertical integration and antitrust policy. Journal of Political Economy, 58(4), 347–352.
Stahl, D. O. (1989). Oligopolistic pricing with sequential consumer search. The American Economic Review, 79(4), 700–712.
Stigler, G. J. (1961). The economics of information. Journal of Political Economy, 69(3), 213–225.
Tellis, G., & Wernerfelt, B. (1987). Competitive price and quality under asymmetric information. Marketing Science, 6(3), 240–253.
Thisse, J. F., & Vives, X. (1988). On the strategic choice of spatial price policy. The American Economic Review, 78(1), 122–137.
Thomas, L., Shane, S., & Weigelt, K. (1998). An empirical examination of advertising as a signal of product quality. Journal of Economic Behavior & Organization, 37(4), 415–430.
Varian, H. R. (1980). A model of sales. The American Economic Review, 70(4), 651–659.
Weitzman, M. L. (1979). Optimal search for the best alternatives. Econometrica, 47(3), 641–654.
Wernerfelt, B. (1988). Umbrella branding as a signal of new product quality: An example of signalling by posting a bond. The RAND Journal of Economics, 19(3), 458–466.
Winter, R. A. (1993). Vertical control and price versus nonprice competition. Quarterly Journal of Economics, 108(1), 61–76.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2014 Springer Science+Business Media New York
About this chapter
Cite this chapter
Moorthy, S. (2014). Marketing Applications of Game Theory. In: Chatterjee, K., Samuelson, W. (eds) Game Theory and Business Applications. International Series in Operations Research & Management Science, vol 194. Springer, Boston, MA. https://doi.org/10.1007/978-1-4614-7095-3_4
Download citation
DOI: https://doi.org/10.1007/978-1-4614-7095-3_4
Published:
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4614-7094-6
Online ISBN: 978-1-4614-7095-3
eBook Packages: Business and EconomicsBusiness and Management (R0)