Dynamic Voluntary Advertising under Partial Market Coverage

Abstract

We consider a dynamic voluntary advertising model with a duopoly. Firms can use advertising and price as competitive tools where product quality is a given and the market is not fully covered by consumers. Advertising also plays a role as a public good. In this situation, we investigate how advertising, profits, and welfare respond to changes in consumer preference and product quality. We mainly find that a higher maximum preference value leads to increases in advertising, profits, and consumer surplus but a decrease in incumbent consumers' utility. We further find that a technology improve- ment by a low-quality firm increase its profit and consumer surplus if the technology gap is relatively large but if this is not the case, then the innovation could have different effects on firms' profits and consumer surplus.