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Marketing Applications of Game Theory

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Game Theory and Business Applications

Part of the book series: International Series in Operations Research & Management Science ((ISOR,volume 194))

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.

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Notes

  1. 1.

    An exception is when price signals an underlying strategic variable such as product quality.

  2. 2.

    With different marginal costs for the two firms, escalation stops at the higher marginal cost.

  3. 3.

    The exception may be models where price signals a demand-raising attribute such as “product quality.”

  4. 4.

    This model may be seen as an asymmetric version of the models in Rosenthal (1980) and Varian (1980).

  5. 5.

    The “loyals” and “switchers” admit a variety of interpretations, among them Varian’s (1980) “uninformed” and “informed” consumers, and Bester and Petrakis’s (1995) “local” and distant consumers.

  6. 6.

    \( {F_2}(p) \) is precisely the conditional distribution of \( {F_1}(p) \) given \( \{p<R\} \).

  7. 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. 8.

    As noted earlier, this order accords with reality, product decisions being harder to change than prices.

  9. 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. 10.

    There is also a symmetric mixed strategy equilibrium.

  11. 11.

    Uninformative advertising, in contrast to demand-enhancing advertising, has no direct effects on demand: \( {D_A}=0 \).

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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

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