Goodwill and dynamic advertising strategies |
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Authors: | Toker Doganoglu Daniel Klapper |
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Institution: | 1. Center for Information and Network Economics, Institut für Statistik, Ludwig-Maximilians-Universit?t München, Akademiestr. 1/I, D-80799, München 2. Christian-Albrechts-Universit?t zu Kiel, Lehrstuhl für Absatzwirtschaft, Westring 425, D-24098, Kiel
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Abstract: | In this paper, we empirically analyze weekly advertising policies of manufacturing firms in consumer goods markets. We assume
firms engage in persuasive advertising, thus policies of firms affect the goodwill of a brand. We introduce a demand and a
goodwill production function. A simple transformation of the demand function allows us to identify not only the demand parameters
but also the parameters of the goodwill production function. We reconstruct the unobserved goodwill levels using these parameters
and past advertising levels. We restrict our attention to Markov Perfect Equilibrium (MPE) strategies which are functions
of payoff relevant state variables. Without imposing further restrictions on the dynamic competitive environment, we investigate
the relationship between observed advertising strategies—which are assumed to be MPE—and payoff relevant state variables by
means of several reduced form specifications. The most important determinant of advertising intensity turns out to be goodwill.
We demonstrate that controlling for an advertising campaign significantly improves the explanatory power of the model.
JEL Classification L13 . C73 . M30 . M37
I would like to thank Volkswagen Stiftung for the generous financial support which made this research possible. |
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Keywords: | Advertising Goodwill Markov perfect equilibrium Dynamic oligopoly |
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