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J Optim Theory Appl

DOI 10.1007/s10957-008-9454-7
Advertising Strategies in a Differential Game
with Negative Competitor’s Interference
B. Viscolani · G. Zaccour
© Springer Science+Business Media, LLC 2008
Abstract We consider a duopolistic industry where the current sales of each firm
is proportional to its goodwill stock. The evolution of the latter depends positively
on own advertising effort and negatively on competitor’s advertising. A standard
assumption in the literature in differential games of advertising is that the players
remain active throughout the whole (infinite) duration of the game. We relax this as-
sumption and characterize the circumstances under which a firm finds it optimal to
remain or exit the industry. Among other things, it is shown that, if both players are
“strong”, then the unique Nash equilibrium is the same that one would obtain in the
absence of interference from competitor’s advertising.
Keywords Differential games · Advertising · Optimal control · Nash equilibrium
1 Introduction
Applications of differential games to advertising competition in oligopolistic mar-
kets has been an active area of research for many decades. In their survey, Jørgensen
and Zaccour [1] categorize the models in the literature in four classes, namely mar-
ket share, sales response, new product diffusion and goodwill models. The root of
Communicated by G. Leitmann.
Research supported by Ministry of University and Research of Italy, University of Padua and
NSERC, Canada.
B. Viscolani
Department of Pure and Applied Mathematics, University of Padua, Padua, Italy
e-mail: viscolani@math.unipd.it
G. Zaccour ()
Chair in Game Theory and Management, GERAD, HEC Montréal, Montréal, Canada
e-mail: georges.zaccour@gerad.ca
J Optim Theory Appl
the goodwill models literature, to which this paper belongs, is the seminal paper by
Nerlove and Arrow [2]. In the latter, as well as in the many other papers that fol-
lowed, the basic idea is that each firm invests in costly advertising in order to raise its
goodwill (reputation or brand equity) stock on which sales rely (see [3] for a survey
of optimal control (non competitive) models, and [1, 4] for competitive models). In
this stream of literature, the evolution of each brand’s goodwill stock, the state vari-
able, is governed by a differential equation where only own advertising matters. The
strategic interaction between the players’ advertising expenditures is captured in the
payoff functionals. This model’s structure is generally easier to analyze, especially
in terms of the determination of a noncooperative equilibrium, than the one where
players’ advertising controls appear both in the profit functions and in the brand’s
goodwill dynamics.
Recently, Nair and Narasimhan [5] and Amrouche et al. [6] considered the more
general case where the evolution of each player’s goodwill depends positively on
her own advertising and negatively on competing brand’s advertising. In Nair and
Narasimhan [5], the goodwill dynamics depend also on both brands’ qualities, and
the sales function is quadratic in each player’s goodwill. In Amrouche et al. [6], the
two players involved in the differential game are the members of a marketing channel,
i.e., a manufacturer and a retailer. The former sells her brand through the retailer who
also offers her own private label to consumers. The idea of including a negative effect
of competitor’s advertising is intuitively appealing especially when the firms engage
in comparative and/or negative advertising. In a comparative advertising message,
the firm communicates the advantages of some, if not all, of its brand’s attributes
with respect to those of the named competing product(s). The aim is to increase the
attractiveness (or goodwill) of own brand, while diminishing the appeal of the other
brands. In a negative advertising campaign, one highlights some real, or perceived,
weak points of the competitors. Note that in practice, e.g., in political campaigns, a
player may use a mixture of negative advertising spots to decrease the competitor(s)
goodwill(s), and positive advertising messages that focus on own merit.
This paper is a follow up to Grosset and Viscolani [7] where they consider an
optimal control advertising problem à la Nerlove-Arrow with the specificity that the
dynamics of goodwill incorporates a negative exogenous interfering term. Here, we
analyze a duopoly where each player’s advertising effort has the dual role of influenc-
ing positively her own goodwill and negatively the competitor’s one. The presence of
such a negative effect in own goodwill dynamics, implies that the stock may possibly
reach the zero value at a certain instant of time. We assume that at the zero goodwill
level any negative advertising effort, as done by the competitor, is ineffective and
leaves the goodwill level unchanged. We represent this economic assumption by in-
troducing a nonnegativity (state) constraint in our model, and we study the conditions
under which a firm may exit the market. Needless to say that the equilibrium analy-
sis here is much more complex than in the case where such constraint is ignored.
Here lies the main contribution of this paper with respect to the literature where these
issues are typically ignored by assuming that the goodwill remains positive for ever.
The rest of this paper is organized as follows. In Sect. 2, we introduce the duopoly
model. In Sect. 3, we state some results concerning the best response function of
a player to the advertising strategy of her competitor. In Sect. 4, we analyze some
J Optim Theory Appl
candidates for being a Nash equilibrium. In Sect. 5, we provide some examples and
we conclude in Sect. 6.
2 Model
We consider a duopoly and refer by j ∈ {1, 2} to a firm or her product or brand.
Let G
j
(t ) be brand j’s goodwill at time t, t ∈ [0, ∞). We assume that the demand
rate for a brand is proportional to its goodwill stock,
D
j
(G
j
(t )) =βG
j
(t ) , j ∈ {1, 2}, (1)
where β > 0 is a parameter measuring goodwill’s efficiency. Note that having dif-
ferent betas would not change the qualitative results in this paper. For this demand
function to make an economic sense, we impose throughout the horizon the nonneg-
ativity constraint
G
j
(t ) ≥ 0. (2)
Denote by u
j
(t ) the advertising effort of player j ∈ {1, 2} at instant of time t ∈
[0, ∞). We assume that the goodwill stocks evolve à la Nerlove-Arrow, i.e.,
˙
G
j
(t ) =γ
j
u
j
(t ) −η
jh
γ
h
u
h
(t ) −δG
j
(t ) , {j, h} = {1, 2}, (3)
where γ
j
≥ 0 is the advertising effort efficiency (or a scaling parameter transforming
advertising dollars into goodwill); η
jh
≥ 0 is the interference (or impact) factor of
competitor h’s advertising on own j’s goodwill evolution; and δ >0 is a decay para-
meter. In Amrouche et al. [6], the authors adopt a similar dynamics with γ
j

h
= 1,
and assume that η
jh
< 1. We dot not impose a priori any restriction on the parame-
ters’ values. Instead, we shall analyze the impact of these values on the noncoop-
erative equilibrium. We assume that the initial goodwill level is given and strictly
positive, i.e.,
G
j
(0) =G
0
j
>0, j ∈ {1, 2}. (4)
We suppose that each player’s advertising cost is convex increasing and for simplicity
is taken quadratic,
1
i.e.,
C
j

u
j
(t )

=
κ
j
u
2
j
(t )
2
, κ
j
>0. (5)
Note that the nonnegativity constraint (2) implies that if the goodwill is zero, a nega-
tive net advertising effect, i.e., γ
j
u
j
(t )−η
jh
γ
h
u
h
(t ) <0, does not affect the goodwill
evolution, whereas a positive one causes the goodwill to increase (becoming positive).
Assuming a profit-maximization behavior, the objective functional of player j ∈
{1, 2} is then given by

j
(u
1
, u
2
) =


0
e
−ρt

π
j
βG
j
(t ) −
κ
j
2
u
2
j
(t )

dt, (6)
1
This assumption is common in differential games in marketing (see [1]).
J Optim Theory Appl
where π
j
> 0 is player j’s margin, that is price net of production cost, and ρ > 0 is
the common discount rate.
To recapitulate, our formulation allows for the dual role of advertising mentioned
in the introduction, and for a firm to drive its competitor out of the industry. For
instance, this may occur if own goodwill is below a certain threshold so that net
revenues are negative, and the firm cannot advertise sufficiently to counter the com-
petitor’s negative advertising effect. A small firm with a low goodwill value (or brand
equity) may find it optimal to exit the market rather than continue battling against a
well positioned firm and incurring losses.
By (3) and (6), we have defined an infinite-horizon differential game with two
control variables u
j
(t ) ≥ 0, j ∈ {1, 2}, and two state variables G
j
(t ) ≥ 0, j ∈ {1, 2}.
We assume a noncooperative mode of play and seek a Nash equilibrium.
3 Best Response Functions
To gain some insight into a player’s strategy, we start by analyzing her best response
to its competitor’s advertising.
The first lemma states that in the absence of interference between players’ adver-
tising, i.e., η
jh
= 0 for j, h = 1, 2, j =h, each player advertises at a constant positive
rate. This result, which can be seen as a benchmark to the case with interference, is
not surprising. Indeed, in the absence of competitor’s negative advertising effect, each
firm solves a linear-state optimal control problem, which explains the constant adver-
tising policy, and where advertising is rewarding, hence the positive optimal level for
this activity.
Lemma 3.1 If η
jh
= 0 for {j, h} = {1, 2}, then there exists a bounded optimal solu-
tion (u
j
(t ), G
j
(t )) for player j’s problem, with constant advertising effort given by
u
j
(t ) ≡u

j
=
β
δ +ρ
·
γ
j
π
j
κ
j
. (7)
Proof We observe that the goodwill component of any admissible pair is strictly
positive at all times, so that the nonnegativity constraint (2) is inactive for all solutions
at all times. Straightforward application of the maximumprinciple provides the result,
as in [8].
The advertising policy in (7) depends on all model’s parameters. It is increasing in
the profit margin (π
j
), the goodwill efficiency (β), and in the advertising efficiency
parameter (γ
j
). On the other hand, if consumers forget quickly about the firm’s ad-
vertising (high δ), or the firm has a strong preference to short term outcomes, i.e., has
a high discount rate ρ, then it will advertise at a lower rate in equilibrium. Also, the
higher the cost of advertising, the less the firm can afford investing in such activity.
Moving now to the case where there is interference between the two firms’ adver-
tising expenditures (η
jh
> 0), the following lemma characterizes the best response
of a firm to a given competitor’s advertising control.
J Optim Theory Appl
Lemma 3.2 Suppose that η
jh
> 0 for {j, h} = {1, 2}. Let u
h
(t ) be the advertising
effort chosen by firm h, a continuous function, and assume there exists a bounded
optimal solution (u
j
(t ), G
j
(t )) of firm j’s problem. Then:
(a) if the goodwill path is strictly positive,
G
j
(t ) >0, for all t >0, (8)
firm j advertises at the constant level given in (7);
(b) if there exists τ >0, such that
G
j
(t ) >0, for t <τ and G
j
(t ) = 0 for t ≥τ, (9)
for some ϑ, firm j’s advertising control is given by
u
ϑ
j
(t ) =u

j
·
¸
1 −e
(δ+ρ)(t −ϑ)
¸
+
, (10)
where the value u

j
is as defined in (7), and
ϑ ≤τ. (11)
Proof Firm j faces an optimal control problem with a pure state constraint. Nev-
ertheless, in case (a), as the pure state constraint is inactive at the optimal solution
(u
j
(t ), G
j
(t )), that solution is optimal also for the relaxed problem we obtain ne-
glecting the constraint (2). Therefore, from Grosset and Viscolani [7] we have that
the optimal control is (7).
In case (b), where the constraint (2) is active at the optimal solution on some
unbounded interval [τ, +∞), we refer to the optimality conditions presented in [9,
Chap. 5]. Denoting by p the adjoint variable appended to player j’s state equation,
her Hamiltonian reads
H

G
j
, u
j
, p, t

=e
−ρt

βπ
j
G
j

κ
j
2
u
2
j

+p

γ
j
u
j
−η
jh
γ
h
u
h
(t ) −δG
j

. (12)
We have
∂H
∂u
j
= −κ
j
u
j
e
−ρt

j
p, (13)
and ∂
2
H/∂u
2
j
= −κ
j
e
−ρt
<0. Hence, the Hamiltonian is strictly concave in u
j
and
there exists a unique maximizing control given by
u
j
=
γ
j
κ
j
e
ρt
¸
p
¸
+
. (14)
The Lagrangian of firm j’s problem is
L

G
j
, u
j
, p, λ, t

=H

G
j
, u
j
, p, t

+λG
j
, (15)
J Optim Theory Appl
where λ is the Lagrange multiplier appended to the nonnegativity constraint G
j
≥ 0.
The adjoint variable p(t ) must be a solution to the linear differential equation
˙ p(t ) =δp(t ) −βπ
j
e
−ρt
−λ(t ), (16)
where
λ(t ) ≥ 0, λ(t )G
j
(t ) = 0. (17)
Now, if (9) holds true, then
λ(t ) = 0, t <τ, (18)
so that p(t ) has the form
p(t ) =Pe
δt
+
βπ
j
δ +ρ
e
−ρt
, (19)
in the interval [0, τ].
Moreover, we can observe that G
j
(t ) = 0 in [τ, +∞) implies u
j
(t ) = 0 and hence
we must have that
p(t ) ≤ 0, t ≥τ. (20)
If P ≥ 0, then p(τ) >0, which contradicts (20). Therefore, P <0, so that
p(t ) =
βπ
j
δ +ρ

1 −e
(δ+ρ)(t −ϑ)

e
−ρt
, (21)
which reaches 0 at the time ϑ and clearly ϑ ≤τ .
The above lemma shows that if the goodwill is positive for ever, then the equi-
librium strategy of player j is the same as in the case where there is no interference
from competitor’s advertising. If the goodwill is zero on [τ, ∞), then the optimal
advertising policy is decreasing on [0, τ], and zero after τ . Further, we observe that
a solution to the necessary conditions in the case (b) of Lemma 3.2 is obtained with
ϑ =τ , the adjoint function on [0, +∞) being given by
p(t ) =
βπ
j
δ +ρ

1 −e
(δ+ρ)(t −τ)

e
−ρt
, t ≥ 0, (22)
and the multiplier
λ(t ) ≡ 0. (23)
The associated control is (10) with
ϑ =τ = min
¸
t | G
j
(t ) = 0
¸
. (24)
In the above lemma, the assumption made on the competitor’s advertising is that
it is a continuous function. The following corollary specializes the results in the case
where the competitor is implementing a constant advertising strategy.
J Optim Theory Appl
Corollary 3.1 Suppose that firm h chooses a constant advertising level, i.e., u
h
(t ) ≡
¯ u
h
≥ 0. If (u
j
(t ), G
j
(t )), with u
j
(t ) ≡u

j
, is an optimal solution of player j’s prob-
lem such that the condition G
j
(t ) >0 for all t >0 holds, then
βα
j
δ +ρ
≥η
jh
γ
h
¯ u
h
, (25)
where
α
j
=
γ
2
j
π
j
κ
j
. (26)
Proof After substituting u
j
(t ) ≡u

j
and u
h
(t ) ≡ ¯ u
h
into the motion equation (3), we
obtain
˙
G
j
(t ) =

βα
j
δ +ρ
−η
jh
γ
h
¯ u
h

−δG
j
(t ) . (27)
Now, in view of the above linear differential equation and of the assumption (4), the
positive goodwill assumption (8) entails the condition (25).
The condition (25) is equivalent to
η
jh

γ
j
γ
h
u

j
¯ u
h
, (28)
i.e., the interference parameter must be less or equal to the product of the ratio of ad-
vertising effectiveness parameters and the ratio of advertising efforts. Unfortunately,
the implication of Lemma 3.2 may not be reversed. For instance, it may occur that
the control u

j
=
β
δ+ρ
γ
j
π
j
κ
j
determines a positive goodwill function, i.e., satisfying (8),
but the corresponding profit is negative. In such case, the control function ˆ u
j
(t ) ≡ 0
would be better than (7), since it provides a positive profit.
The following lemma shows that if a firm finds it optimal to exit the market, then
the optimal advertising and goodwill trajectories and exit time are the solution to an
optimal control problem with free end time.
Lemma 3.3 If ( ˆ u
j
(t ),
ˆ
G
j
(t )) is an optimal solution of player j’s problem, with
ˆ u
j
(t ) =u
ϑ
j
(t ) being the exit control (10), ϑ the final advertising time and τ = min{t |
ˆ
G
j
(t ) = 0} the exit time, then the triplet ( ˆ u
j
(t ),
ˆ
G
j
(t ), τ) is an optimal solution of
the variable final time problem of maximizing

T, u
j

=

T
0
e
−ρt
¸
βπ
j
G
j
(t ) −
κ
j
2
u
2
j
(t )
¸
dt, (29)
J Optim Theory Appl
subject to
˙
G
j
(t ) = −δG
j
(t ) +γ
j
u
j
(t ) −η
jh
γ
h
u
h
(t ),
G
j
(0) =G
0
j
>0,
G
j
(T ) = 0,
u
j
(t ) ≥ 0.
(30)
Proof Let us assume that ( ˆ u
j
(t ),
ˆ
G
j
(t ), τ) is not optimal for the variable final time
problem. Therefore, there exists a control w and a time τ

>0 such that

τ, ˆ u
j

<

τ

, w

. (31)
After defining the control function
¯ w
τ
(t ) =
¸
w(t ), t ∈ [0, τ

),
0, t ∈ [τ

, +∞),
(32)
we notice that the following equality holds:

τ

, w

=( ¯ w
τ
) . (33)
Moreover, we have that

τ, ˆ u
j

=

ˆ u
j

, (34)
because, after the time τ , the state variable remains always 0 (hence the optimal
control u
j
after τ must be identically equal to 0). Finally, from (31), (33), and (34)
we obtain

ˆ u
j

=

τ, ˆ u
j

<

τ

, w

=( ¯ w
τ
) , (35)
so that ˆ u
j
cannot be optimal for firm j’s problem.
In the following lemma, we prove that if the exit control is optimal for a player,
then the latter must advertise at a positive level until the exit time.
Lemma 3.4 Let ( ˆ u
j
(t ),
ˆ
G
j
(t ), τ) be an optimal solution of the variable final time
problem of maximizing the objective functional (29), subject to the conditions (30);
then the optimal control is ˆ u
j
(t ) =u
ϑ
j
(t ) as in (10) and
ϑ =τ. (36)
Proof The Hamiltonian is (12) and it has a unique maximum point which is charac-
terized by (14). The adjoint function p(t ) must be a solution to the linear differential
equation
˙ p(t ) =δp(t ) −βπ
j
e
−ρt
, (37)
J Optim Theory Appl
so that it must have the form given by (19). Moreover, the optimal final time T must
satisfy the condition
H

G
j
(T ) , u
j
(T ) , p(T ) , T

= 0, (38)
which is equivalent to
−η
jh
γ
h
u
h
(T )p(T ) = 0, (39)
because G
j
(T ) = 0 and we know from Lemma 3.2 that u
j
(T ) = 0. Now, the com-
petitor’s advertising effort u
h
(t ) must be strictly positive in a neighborhood of the
final time, so that condition (39) implies that p(T ) = 0. Therefore, we obtain the
adjoint function (22).
More precise information on the exit time can be obtained in the case of a constant
advertising effort by the manufacturer h.
Corollary 3.2 Let u
h
(t ) ≡ ¯ u
h
≥ 0 be a constant advertising level chosen by player h;
if (u
j
(t ), G
j
(t )), with u
j
(t ) = u
τ
j
(t ), is an optimal solution of player j’s problem,
then τ is a solution of the exit time equation
η
jh
γ
h
¯ u
h
−γ
j
u

j
δ
(e
δτ
−1) +
γ
j
u

j
(e
δτ
−e
−(δ+ρ)τ
)
2δ +ρ
=G
0
j
. (40)
Proof It suffices to insert the controls u
h
(t ) ≡ ¯ u
h
and u
j
(t ) = u
τ
j
(t ) in (3) and to
integrate using G
j
(τ) = 0 and the initial condition (4) to get the result.
The following lemma characterizes the optimal policy candidates for player j
when her competitor h uses a constant advertising effort, u
h
(t ) ≡ ¯ u
h
≥ 0. The char-
acterization depends on essentially two quantities, namely, the value of the constant
control when there is no interference (u

j
=
β
δ+ρ
γ
j
π
j
κ
j
), and the initial value of the
goodwill. The results and the proof are similar to those in [7], where a one-player
optimal control advertising problem is considered with goodwill dynamics involving
an exogenous interference factor.
Lemma 3.5 For {j, h} = {1, 2}, let u
h
(t ) ≡ ¯ u
h
≥ 0 be a constant advertising effort
chosen by player h; then, there exists a unique optimal solution (u
j
(t ), G
j
(t )) for
player j’s problem, and one of the following cases occurs:
(a) if
¯ u
h
>
1
2δ +ρ
·
βα
j
η
jh
γ
h
=
δ +ρ
2δ +ρ
γ
j
η
jh
γ
h
u

j
,
then
u
j
(t ) = u
τ
j
(t ); (41)
and τ =τ( ¯ u
h
, G
0
j
), such that u
j
(t ) = 0 and G
j
(t ) = 0, for all t ≥τ ;
J Optim Theory Appl
(b) if
¯ u
h
=
1
2δ +ρ
·
βα
j
η
jh
γ
h
,
then
(b.1) either G
0
j
≥γ
j
u

j
/(2δ +ρ) and u
j
(t ) is the constant control
u
j
(t ) ≡ u

j
; (42)
(b.2) or G
0
j

j
u

j
/(2δ +ρ) and u
j
(t ) =u
τ
j
(t ) as in case (a);
(c) if
¯ u
h
<
1
2δ +ρ
·
βα
j
η
jh
γ
h
,
then
(c.1) either G
0
j

˜
G
j

j
u

j
, η
jh
γ
h
¯ u
h
), where
˜
G
j
(w, ζ ) =
w −ζ
δ

w
δ

1 −
ζ
w

δ +ρ
2δ +ρ

δ+ρ
2δ+ρ
, (43)
and u
j
(t ) ≡u

j
as in case (b.1);
(c.2) or G
0
j
<
˜
G
j

j
u

j
, η
jh
γ
h
¯ u
h
) and u
j
(t ) is either the exit control (41) or the
constant control (42).
Moreover, if the constant control (42) is optimal, then we observe a positive good-
will for the product j,
G
j
(t ) >0, for all t ≥ 0. (44)
Proof If player j knows that player h implements a constant advertising policy, then
her optimization problem becomes analogous to the optimal control problem ana-
lyzed in [7], with however an exogenous interference term (although the goodwill
variable may take also negative values there). The statement of the present lemma
follows from Theorems 3–5 in [7], after replacing u, G, α, π, γ , k with u
j
, G
j
, G
0
j
,
π
j
, γ
j
, k
j
and the interference term ζ with η
jh
γ
h
¯ u
h
.
4 Equilibrium Candidates
As a first consequence of the analysis of the previous section, we obtain a necessary
condition for a special Nash equilibrium of the game.
Lemma 4.1 If there exists an open-loop Nash equilibrium (u
N
1
(t ), u
N
2
(t )) with
G
N
j
(t ) >0, for all t >0, j ∈ {1, 2},
then the advertising efforts are constant,
u
N
j
(t ) =u

j
, j ∈ {1, 2}, (45)
J Optim Theory Appl
where u

j
is given in (7). Moreover,
η
jh
≤ ˜ η
jh
=
δ +ρ
2δ +ρ
α
j
α
h
, {j, h} = {1, 2}, (46)
and the limit goodwill values are
G
N
j
=
β
δ(δ +ρ)

α
j
−η
jh
α
h

, {j, h} = {1, 2}. (47)
Proof The statement on the controls (45) is an immediate consequence of Lemma 3.2.
Since the players’ controls in (45) are constant, we can use Corollary 3.1 and obtain
that the conditions (46) are necessary for the optimality of such controls. Finally, the
limit goodwill values are obtained easily by integrating the motion equations with the
use of the equilibrium controls.
The quantity ˜ η
jh
defined in (46) for {j, h} = {1, 2}, is the maximal interference
value to having a Nash equilibrium of the kind described in the above lemma. Note
that this threshold is invariant with respect to the demand parameter β. Indeed, we
have
˜ η
jh
=
δ +ρ
2δ +ρ
γ
2
j
π
j
κ
h
γ
2
h
π
h
κ
j
=
δ +ρ
2δ +ρ
α
j
α
h
, {j, h} = {1, 2}. (48)
In terms of equilibrium advertising strategies, this upper bound can be defined as
˜ η
jh
=
γ
j
γ
h
u

j
u

h
. (49)
The difference between this bound and the one in (28) is that now player h’s constant
advertising level is also the one obtained in the non interference case (Lemma 4.1).
Further, the goodwill positivity condition G
j
(t ) > 0, t > 0, does not guarantee that
player j will collect a positive profit, nor, more importantly, that the constant control
u
j
(t ) ≡ u

j
is conditionally optimal. Therefore, the implication of Lemma 4.1 may
not be reversed, in general.
If the hypothesis of Lemma 4.1 holds true, then player j’s profit associated with
the equilibrium pair (u
N
1
(t ), u
N
2
(t )) ≡(u

1
, u

2
) is given by

j
(u

1
, u

2
) =
βπ
j
δ +ρ
¸
G
0
j
+
β
ρ(δ +ρ)

α
j
2
−η
jh
α
h

¸
. (50)
A sufficient condition for the above value to be positive is
η
jh

α
j

h
. (51)
Note that this condition is stronger than η
jh

δ+ρ
2δ+ρ
α
j
α
h
which intervenes in Lem-
ma 4.1. Still, it does not guarantee the conditional optimality of the constant controls
J Optim Theory Appl
u
j
(t ) ≡u

j
, j ∈ {1, 2}, and hence it is not sufficient for claiming that the strategy pair
(u
N
1
(t ), u
N
2
(t ) ≡(u

1
, u

2
) is a Nash equilibrium.
If we suppose that u
h
(t ) = u

h
is the advertising effort of player h, as in
Lemma 4.1, we obtain from Lemma 3.5 that player j has a unique optimal choice.
Note that only under some restrictive conditions this optimal choice is the constant
control u
j
(t ) = u

j
and the associated goodwill function is strictly positive at all
times. In general, the optimal solution may have a zero goodwill at some time.
Corollary 4.1 For {j, h} = {1, 2}, let u
h
(t ) =u

h
be the advertising level of player h.
If (u
j
(t ), G
j
(t )) is an optimal control-state pair of player j’s problem, G
j
(t ) = 0, for
some t > 0, τ = min{t | G
j
(t ) = 0}, then u
j
(t ) = u
τ
j
(t ) and the time τ is a solution
of the equation
G
0
j
+
β(α
j
−η
jh
α
h
)(e
δτ
−1)
δ(δ +ρ)
=
βα
j
(e
δτ
−e
−(δ+ρ)τ
)
(δ +ρ)(2δ +ρ)
; (52)
moreover,
G
j
(t ) = 0, for all t >τ. (53)
Proof It is straightforward from Corollary 3.2.
The advertising policy (10), as defined in Lemma 3.2, entails that player j even-
tually goes out of business if player h advertises at the constant level u

h
.
One of our results is that, if player h implements the constant advertising pol-
icy which is optimal in the absence of interference, i.e. u

h
, then, depending on the
model’s data, the best response of player j can be either to implement the correspond-
ing constant strategy u

j
, or her exit control u
τ
j
(t ). Given this, a natural question is
then under which circumstances player j would select u

j
or u
τ
j
(t )? By circumstances,
we refer to the values of the interference parameters and to the initial goodwill stocks.
Assume that player h chooses the control u

h
. In the sequel, we shall qualify player j
as a strong player if her best response to u

h
is u

j
, and as a weak player if her best
response is the exit control u
τ
j
(t ). In some cases it is easy to characterize the type of
player j. For instance, using the results in Lemma 3.5, we have
• if
η
jh
≤ ˜ η
jh
and G
0
j

˜
G
j

j
u

j
, η
jh
γ
h
u

h
), (54)
then j is a strong player;
• if
η
jh
> ˜ η
jh
or

η
jh
= ˜ η
jh
and G
0
j
<
˜
G
j

j
u

j
, η
jh
γ
h
u

h
)

, (55)
then j is a weak player.
Indeed, the sufficient conditions (54) and (55) are equivalent to case (c.1) and to
case (a) or (b.2), respectively. If these conditions are not fulfilled, i.e.,
η
jh
< ˜ η
jh
and G
0
j
<
˜
G(γ
j
u

j
, η
jh
γ
h
u

h
), (56)
J Optim Theory Appl
then both policies (u

j
and u
τ
j
(t )) may be optimal for player j. One possible way out
to determine player j’s type is to compare numerically the profits associated with the
two strategies.
Using this classification of players and the results obtained previously, we state
some results on existence and uniqueness of a Nash equilibrium in the cases where
(i) both players are strong; (ii) one player is strong and the other is weak. The fol-
lowing theorem presents the more interesting case for the two players, i.e., when they
remain both in business forever.
Theorem 4.1 If both players are strong, then
(u
N
1
(t ), u
N
2
(t )) =(u

1
, u

2
) (57)
is the unique open-loop Nash equilibrium.
Proof Being strong, the best response of player j = {1, 2} to player h = {1, 2}, h =j,
choice of u
h
(t ) ≡u

h
, is u

j
. Therefore, (u
N
1
(t ), u
N
2
(t )) =(u

1
, u

2
) is the unique open-
loop Nash equilibrium.
In economic terms, if the interference factor is not “too large” and initial goodwill
stocks are “sufficiently high”, which is the case for instance of already well know
established brands with loyal customer basis, then the firms’ advertising behavior is
the same as in the optimal control problem where there is no interference.
The next lemma and theorem show that if one player is strong and the other
is weak, then, in the resulting unique open-loop Nash equilibrium, only the strong
player remains in business throughout the whole duration of the game.
Lemma 4.2 If u

j
is the best response of player j to player h’s advertising effort u

h
,
then it is so also to any player h’s strategy u
h
(t ) ≤u

h
.
Proof Let G
j
(t ; u
j
, u
h
) be the goodwill of player j, when player j chooses the strat-
egy u
j
and player h the strategy u
h
.
If there exists a best response u
j
(t ) of player j to player h’s advertising effort
u
h
(t ) ≤ u

h
and if the associated goodwill is always positive, G
j
(t ; u
j
, u
h
) > 0 for
all t , then u
j
(t ) = u

j
, because of Lemma 3.2. On the other hand, G
j
(t ; u

j
, u
h
) ≥
G
j
(t ; u

j
, u

h
) >0 for all t .
On the contrary, if u

j
is not a best response to player h’s advertising effort u
h
(t ),
then there exists a policy ˜ u
j
(t ) of player j and a time τ such that G
j
(τ; ˜ u
j
, u
h
) = 0
and

j
( ˜ u
j
(t ), u
h
(t )) >
j
(u

j
, u
h
(t )). (58)
If player h moves from policy u
h
(t ) to u

h
, then player j’s payoff reduction is

j
(u
j
(t )) =
j
(u
j
(t ), u
h
(t )) −
j
(u
j
(t ), u

h
)
= π
j
β


0
e
−ρt
Y(t )dt, (59)
J Optim Theory Appl
where
Y(t ) =G
j
(t ; u
j
, u
h
) −G
j
(t ; u
j
, u

h
) ≥ 0. (60)
Now,
• if u
j
(t ) =u

j
, then Y(t ) =Y

(t ) satisfies the linear differential equation
˙
Y(t ) =η
jh
γ
h

u

h
−u
h
(t )

−δY(t ), Y(0) = 0; (61)
• if u
j
(t ) = ˜ u
j
(t ), then Y(t ) =
˜
Y(t ) behaves as follows:
– in all intervals [t
0
, t
1
] where G
j
(t ; ˜ u
j
, u

h
) >0, we observe that G
j
(t ; ˜ u
j
, u
h
(t ))
>0 too and Y(t ) satisfies the linear differential equation
˙
Y(t ) =η
jh
γ
h

u

h
−u
h
(t )

−δY(t ), Y(t
0
) = 0, (62)
– in all intervals [t
0
, t
1
] where G
j
(t ; ˜ u
j
, u
h
(t )) = 0, we have that G
j
(t ; ˜ u
j
, u

h
) = 0
too, and Y(t ) = 0,
– in all intervals [t
0
, t
1
] where G
j
(t ; ˜ u
j
, u
h
(t )) >G
j
(t ; ˜ u
j
, u

h
) = 0, Y(t ) satisfies
the equation
˙
Y(t ) =γ
j
˜ u
j
(t ) −η
jh
γ
h
u
h
(t ) −δY(t ). (63)
Therefore, we obtain that Y

(t ) ≥
˜
Y(t ), so that

j
(u

j
) ≥
j
( ˜ u
j
(t )), (64)
and in view of (58),

j
( ˜ u
j
(t ), u

h
) =
j
( ˜ u
j
(t ), u
h
(t )) −
j
( ˜ u
j
(t ))
>
j
(u

j
, u
h
(t )) −
j
(u

j
) =
j
(u

j
, u

h
). (65)
This result contradicts the assumption that u

j
is the best response of player j to
player h’s advertising effort u

h
.
Theorem 4.2 For {j, h} = {1, 2}, if player j is strong and player h is weak, then

u
N
j
(t ), u
N
h
(t )

=

u

j
, u
τ
h
(t )

, (66)
with τ >0 satisfying (52), is the unique open-loop Nash equilibrium.
Proof In view of his strong position, the manufacturer j could suffer at most the
interference due to the advertising policy u
h
(t ) ≡ u

h
by the competitor h, and even
in this case he should find u
j
(t ) ≡ u

j
as his unique optimal strategy, because of
Lemma 4.2. Furthermore, since player h is weak, her best response to u
j
(t ) = u

j
,
is u
τ
h
(t ).
J Optim Theory Appl
5 Examples
To gain some additional insight in the equilibrium strategies, we shall consider some
simple instances of the game. In the first example, the only difference between the
players lie in their initial stocks of goodwill. In the other examples, the two players
differ also in terms of one of the parameter values.
5.1 Different Initial Goodwill Stocks
Assume that the two players are symmetric in all respects but differ in terms of their
initial goodwill values, i.e.,
π
j
=π, κ
j
=κ, γ
j
=γ, η
jh
=η, G
0
1
=G
0
2
, {j, h} = {1, 2}.
In this case, it is easy to verify that we have
˜ η
12
= ˜ η
21
= ˜ η =
δ +ρ
2δ +ρ
.
Therefore, a necessary condition for the existence of a Nash equilibrium with positive
goodwill is
η ≤ ˜ η <1.
The following pair, of constant advertising levels, is a candidate for being a Nash
equilibrium with positive goodwill:
u

1
=u

2
=u

=
β
δ +ρ
·
πγ
κ
.
The initial goodwill threshold value for the players’ classification is
˜
G=
˜
G(γ u

, ηγ u

) =
β
δ(δ +ρ)
πγ
2
κ
¸
1 −η −

1 −
2δ +ρ
δ +ρ
η

δ+ρ
2δ+ρ
¸
.
If η < ˜ η, then player j is strong if G
0
j

˜
G, otherwise the condition (56) holds.
Therefore, we can state that:
• if G
0
1

˜
G and G
0
2

˜
G, then the pair (u

1
, u

2
) =(u

, u

) is the unique Nash equi-
librium (see Theorem 4.1);
• if G
0
1

˜
G and G
0
2
<
˜
G, then a unique Nash equilibrium exists, and it is ei-
ther (u

, u

), or (u

, u
τ
2
2
(t )); symmetrically, there is the case where G
0
1
<
˜
G and
G
0
2

˜
G;
• if G
0
1
<
˜
G and G
0
2
<
˜
G, then a variety of equilibria may be observed.
If η > ˜ η, we observe that both players are weak. The strategy pair (u

, u

) cannot
be a Nash equilibrium, and only one player may stay in the market in the long run.
If η = ˜ η, we observe that player j is strong if and only if G
0
j

˜
G, otherwise he is
weak. Therefore a variety of equilibria may be observed.
J Optim Theory Appl
5.2 Different Advertising Effectiveness
Suppose that players are symmetric with respect to all parameters but the advertising
efficiency ones, i.e.,
π
j
=π, κ
j
=κ, η
jh
=η, γ
1

2
, G
0
1
=G
0
2
, {j, h} = {1, 2}.
A necessary condition for the existence of a Nash equilibrium with positive goodwill
for player j is
η ≤ ˜ η
jh
=
δ +ρ
2δ +ρ
γ
2
j
γ
2
h
, {j, h} = {1, 2}.
If the above condition holds, then the following advertising strategy of player j is a
candidate for a possible Nash equilibrium with positive goodwill:
u

j
=
β
δ +ρ
·
π
κ
γ
j
.
To classify player j, we compute
˜
G(γ
j
u

j
, ηγ
h
u

h
) =
βπ
δ(δ +ρ)κ
¸
γ
2
j
−ηγ
2
h

γ
2
j

2δ +ρ
δ +ρ
ηγ
2
h

δ+ρ
2δ+ρ
γ

2δ+ρ
j
¸
.
Note that
˜
G(γ
1
u

1
, ηγ
2
u

2
) =
˜
G(γ
2
u

2
, ηγ
1
u

1
), in general.
If η >max{ ˜ η
12
, ˜ η
21
}, or η <min{ ˜ η
12
, ˜ η
21
}, then we have the same cases as in the
previous example, with η > ˜ η, or η < ˜ η, respectively.
On the other hand, if
min{ ˜ η
12
, ˜ η
21
} = ˜ η
jh
<η < ˜ η
hj
= max{ ˜ η
12
, ˜ η
21
},
then we observe that player j is weak, whereas player h is strong if G
0
h

˜
G(γ
h
u

h
, ηγ
j
u

j
), alternatively the condition (56) holds. In the first case the strate-
gies u
j
(t ) = u
τ
j
j
(t ) and u
h
(t ) =u

h
characterize the unique Nash equilibrium. In the
latter an equilibrium may be present in different forms, but the constant bistrategy
(u

1
, u

2
) =(u

, u

) cannot be a Nash equilibrium.
5.3 Different Advertising Interference
Suppose that
π
j
=π, κ
j
=κ, γ
j
=γ, η
12

21
, G
0
1
=G
0
2
, {j, h} = {1, 2}.
The interference factor thresholds are then given by
˜ η
12
= ˜ η
21
= ˜ η =
δ +ρ
2δ +ρ
.
J Optim Theory Appl
A necessary condition for the existence of a Nash equilibrium with positive goodwill
for player j is
η
jh
≤ ˜ η.
The candidate advertising effort of each player in a possible Nash equilibrium with
positive goodwill is
u

1
=u

2
=u

=
β
δ +ρ
·
πγ
κ
.
The goodwill threshold for player j’s classification is given by
˜
G(γ u

, η
jh
γ u

) =
β
δ(δ +ρ)
πγ
2
κ
×
¸
1 −η
jh

1 −
2δ +ρ
δ +ρ
η
jh

δ+ρ
2δ+ρ
¸
.
If min{η
12
, η
21
} > ˜ η, or max{η
12
, η
21
} < ˜ η, then we find exactly the same cases
as in the first example, with η > ˜ η, or η < ˜ η, respectively. If η
hj
< ˜ η < η
jh
, then
we obtain the same cases as in the scenario with different advertising effectiveness
parameters with ˜ η
jh
<η < ˜ η
hj
.
As a special case of advertising interference asymmetry, let us suppose that
η
21
= 0 <η
12
,
i.e., player 2 cannot influence the goodwill dynamics of player 1. The only differ-
ences with the results above are the thresholds for players’ classification. Player 2 is
strong independently of her initial goodwill stock value. Player 1 threshold is given
by
˜
G(γ u

, η
12
γ u

) >0.
If η
12
> ˜ η, then player 1 is weak and (u
τ
1
1
, u

) is the unique Nash equilibrium.
If η
12
< ˜ η, then the initial goodwill G
0
1
must be considered to characterize the
type of player 1: if G
0
1

˜
G(γ u

, η
12
γ u

), then player 1 is strong, and (u

, u

) is
the unique Nash equilibrium; if G
0
1
<
˜
G(γ u

, η
12
γ u

), then player 1 may either be
strong or weak, and either (u

, u

) or (u
τ
1
1
, u

) is the unique Nash equilibrium.
6 Conclusion
We modified the Nerlove-Arrow dynamics to account for negative effect of competi-
tor’s advertising on own goodwill in a duopoly. This feature and the explicit con-
sideration of the nonnegativity constraint of goodwill have considerably complicated
the analysis of equilibrium strategies. We were able to fully predict the equilibrium
advertising levels only in some instances. Several extensions to this work are worth
conducting. First, one may explore the idea that the interference factor depends on the
goodwill values. For instance, the higher the goodwill of the opponent, the higher is
the (negative) impact of its advertising on own goodwill. Needless to say that this ex-
tension is much more difficult than our setting here, since the adjoint equations cannot
be solved independently of any information on the controls. Second, it is of interest
to analyze the case where each firm can engage in positive advertising, to increase its
J Optim Theory Appl
own goodwill and without any effect and competitor’s goodwill, as well as in negative
advertising which aims at damaging the competitor’s goodwill, without necessarily
enhancing its own goodwill. As stated in the introduction, this corresponds to what is
seen in some political marketing contexts. Here the goodwill can be measured as the
share of the vote as predicted by opinion surveys. Third, one can consider the case
where the market is segmented with different values of the interference parameters.
One may test the hypothesis if in equilibrium, the firms target only segments where
the interference is low. Finally, one may consider a duopoly with a leader, and check
if this leads to more or less aggressive advertising than in the symmetric setting.
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