Optimal pricing and advertising in a durable-good duopoly

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European Journal of Operational Research, ISSN: 0377-2217, Vol: 200, Issue: 2, Page: 486-497

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Anand Krishnamoorthy; Ashutosh Prasad; Suresh P. Sethi
Elsevier BV
Computer Science; Mathematics; Decision Sciences; Control; Dynamic programming; Game theory; Marketing; Differential games; DYNAMIC DUOPOLY; DIFFERENTIAL GAME; CONSUMER DURABLES; MODEL; STRATEGIES; COMPETITION; DIFFUSION; QUALITY; Management; Operations Research & Management Science
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This paper analyzes dynamic advertising and pricing policies in a durable-good duopoly. The proposed infinite-horizon model, while general enough to capture dynamic price and advertising interactions in a competitive setting, also permits closed-form solutions. We use differential game theory to analyze two different demand specifications – linear demand and isoelastic demand – for symmetric and asymmetric competitors. We find that the optimal price is constant and does not vary with cumulative sales, while the optimal advertising is decreasing with cumulative sales. Comparative statics for the results are presented.