Differential Advertising Oligopoly With RTT

Outline
Introduction
Random Terminal Time
The model
Stability of Cooperation
Bibliography
Stability of Cooperation on a Differential Game of

Goodwill Accumulation with Depreciation
Mario Alberto Garca-Meza
November 3, 2016
Stability of Cooperation on a Differential Game of Goodwill Accu
Outline
Introduction
The model
Bibliography
Introduction
The problem

Risk of failure
The model
Non-cooperative game
Cooperative Game
Allocation of profit
Time consistency
Bibliography
Outline
Introduction
The model
Bibliography
The problem
Game Theory
the study of mathematical models of conflict and cooperation

between intelligent rational decision-makers.
Outline
Introduction
The model
Bibliography
The problem
Outline
1
Introduction
The problem

Risk of failure
The model
Cooperative Game
Time consistency
Bibliography
Outline
Introduction
The model
Bibliography
The problem
Consider an oligopoly of n players competing for sales volume.

The firms are symmetrical.
Outline
Introduction
The model
Bibliography
The problem

They use advertising to increase sales volume.
Outline
Introduction
The model
Bibliography
The problem

Advertising increases goodwill for the firm and the industry.
Outline
Introduction
The model
Bibliography
The problem

The effect of advertising wears off in time.
Outline
Introduction
The model
Bibliography
The problem

The effect of advertising wears off in time.
They compete during a period of time that is random
Outline
Introduction
The model
Bibliography
The problem
Firms profit function
Each firm wants to maximize its profit

Z Ti

(si (G ( )) C (ai ))d ,
Ji (ai ) = E
t
Subject to the advertising Goodwill

Gi = ai (t) Gi (t)
Gi (0) = g0i > 0, i N
Outline
Introduction
The model
Bibliography
The problem
Since Ti is a r.v., the payoff can be stated as

Z Zt
(si (G ( )) C (ai )) d dF (t).
Ji (ai ) =
0
Outline
Introduction
The model
Bibliography
The problem
Cost function
The cost of advertising efforts is given by the function C (ai ), where

C (ai ) =
c 2
a
2 i
Outline
Introduction
The model
Bibliography
The problem
Sales function
The sales volume of firm i are given by

"
#
3
X
si (G ) =
Gh Gi .
h=1
Outline
Introduction
The model
Bibliography
The problem
Sales function characteristics
We have that
si
Gi
> 0 when
Pn
i=1 Gi (t)
+ Gi (t) < .
Outline
Introduction
The model
Bibliography
The problem
We have that
Also
2s
Gi2
si
Gi
> 0 when
Pn
i=1 Gi (t)
+ Gi (t) < .
< 0.
Outline
Introduction
The model
Bibliography
The problem
We have that
Also
2s
Gi2
si
Gi
> 0 when
Pn
i=1 Gi (t)
+ Gi (t) < .
< 0.
As well as
si
2 si
Gk , Gi Gk
< 0 for any k 6= i.
Outline
Introduction
The model
Bibliography
The problem
Therefore, the payoff of agent i is given by

Z Zt
"

3
X
#
Gh
h=1
c
Gi ai2
2
!
d dF (t).
Outline
Introduction
The model
Bibliography
Risk of failure
Outline
1
Introduction
The problem

Risk of failure
The model
Cooperative Game
Time consistency
Bibliography
Outline
Introduction
The model
Bibliography
Risk of failure
The terminal time of the game is defined by T = min{Ti }. Let

{Ti }ni=1 be the set of terminal times for all players in N, defined by
independent random variables, with corresponding probability
distribution functions {Fi (t)}ni=1 . Then, the probability distribution
function F (t) of random variable T = min{Ti } has the following
form:
n
Y
F (t) = 1
(1 Fi (t)).
i=1
Outline
Introduction
The model
Bibliography
Risk of failure
Let us consider an exponential distribution for Ti , i = 1, . . . , n:

fi (t) = i ei t , where i is players i hazard function. Then we
have that
R t the survival function is given by 1 Fi (t). Note that
F (t) = 0 e d = 1 et . Therefore,
1 F (t) = e
Rt
0
i (s)ds
Outline
Introduction
The model
Bibliography
Risk of failure
Let {Ti }ni=1 be a set of independent random variables with

probability distribution function Fi (t), i = 1, . . . , n and hazard
functions {i (t)}ni=1 . Then for the random variable
T = min{Ti }ni=1 , the hazard function (t) can be calculated by
(t) =
n
X
i (t).
(1)
i=1
Then, for the problem with T = min{Ti }ni=1 , where Ti has

exponential distribution and the players have different parameters
i , we get:
1 F (t) = e
Pn
i=1
i t
(2)
Outline
Introduction
The model
Bibliography
"
(1 F (t))
Ji (ai ) =
0
Risk of failure
n
X
h=1
c
Gh (t) Gi (t) ai2
2
!
dt. (3)
Plug (2) and (1) into (3) to get the payoff function for the i-th
player:
Z
Ji (ai ) =
0
"
et
n
X
h=1
c
Gh (t) Gi (t) ai2
2
!
dt,
(4)
Outline
Introduction
The model
Bibliography
Cooperative Game
How to proceed?
Computation of the value functions for the non-cooperative

game.
Outline
Introduction
The model
Bibliography
Cooperative Game
How to proceed?

game.
Computation of the value functions for the cooperative game.
Outline
Introduction
The model
Bibliography
Cooperative Game
How to proceed?

game.
At the start of the game, firms agree for the cooperative
game, but if at any time t [0, ) might deviate, if its
convenient.
Outline
Introduction
The model
Bibliography
Cooperative Game
How to proceed?

game.
At the start of the game, firms agree for the cooperative
game, but if at any time t [0, ) might deviate, if its
convenient.
We have to find a way to allocate the coalition profits. We are
particularly interested in a time-consistent allocation.
Outline
Introduction
The model
Bibliography
Cooperative Game
Outline
1
Introduction
The problem

Risk of failure
The model
Cooperative Game
Time consistency
Bibliography
Outline
Introduction
The model
Bibliography
Cooperative Game
For the game to arrive a Nash equilibrium, this function should

satisfy the Hamilton Jacobi Bellman (HJB) equation
)
( "
#
3
X
Vi
c 2
Vi (G ) = max
(ai Gi )
Gh Gi ai (t) +
ai 0
2
Gi
h=1
(5)
Outline
Introduction
The model
Bibliography
Cooperative Game
Maximization of the right-hand side yields the advertising rates,

(
1 Vi
i
if V
Gi > 0
ai (t) = c Gi
i
0
if V
Gi 0.
Outline
Introduction
The model
Bibliography
Cooperative Game
Inserting the positive advertising rates in the HJB equation and

solving for the value function we get
#
"

3
X
1
Vi 2 Vi
Vi (G ) =
Gh Gi +
Gi
if ai > 0
2c Gi
Gi
h=1
"
#
3
X
Vi (G ) =
Gh Gi
if ai > 0
h=1
Outline
Introduction
The model
Bibliography
Cooperative Game
The value function has a solution of the form

Vi (G ) = +Gi +
n
X
B X 2 X X
A 2
Gi +(A Gi +B )
Gj +
Gj +
B Gj Gk
2
2
j6=i
j6=i
j6=i k=j
Where , A , A , A , B , B , B are constants to be determined.

From this follows that
X
Vi
= A + A Gi +
A Gj .
Gi
j6=i
Outline
Introduction
The model
Bibliography
Cooperative Game
The values of the parameters

A2
cA = c + A A cA
2c
cA = 2A 2c 2cA
cA = A A c cA
=
cB = A A
cB = cB = A2
Outline
Introduction
The model
Bibliography
Cooperative Game
This system of equation admits as a feasible solution

q

2
2
A =
c ( + 2) + 8c c > 0
2

q
1
1
B = 2
(4 + c(2 2 + 2 + 2 )) + 2 c 2 ( + 2)2 + 8c <
2

q
1
A =
2c + c 8c + c 2 (2 + )2 < 0
2

q
1
1
1
2
2
2
2
(4 + c(2 + 2 + )) + 2 c ( + 2) + 8c
B = B = 2
2

q
1
A =
c c 2 ( + 2)2 + 8c < 0
2
Where , 1 (c( + ) + 2).

Outline
Introduction
The model
Bibliography
Cooperative Game
After some algebraic manipulation, we can see that A = A

and A = A + c, This yields
X
Vi
= A Gi +
Gj + cGi
Gi
j6=i
Where A < 0 and > 0.
Outline
Introduction
The model
Bibliography
Cooperative Game
The optimal advertising rate is a function of the derivative of the

value function. Therefore, inserting (25) in (20) we arrive at
X
A
Gi +
Gj + Gi
ai (G ) =
c
j6=i
Inserting this equation into the goodwill dynamics (6), we can

obtain the equilibrium path of the game, that is given by
A
G i =
Gi +
Gj
c
j6=i
Outline
Introduction
The model
Bibliography
Cooperative Game
By solving the differential equation we get
Gi (t) = exp
( + n 1)t
o
g0
+n1

+
.
+n1
Outline
Introduction
The model
Bibliography
Cooperative Game
Outline
1
Introduction
The problem

Risk of failure
The model
Cooperative Game
Time consistency
Bibliography
Outline
Introduction
The model
Bibliography
Cooperative Game
Cooperative Game
Z
J(a1 , . . . , an ) =
0
et
n
X
i=1
"

3
X
h=1
#
Gh
c
Gi ai2
2
!
dt.
Outline
Introduction
The model
Bibliography
Cooperative Game
Let V (G ) be a continuously differentiable function that solves HJB

equation
(
V (G ) =
max
a1 ,...,an 0
n
X
"
i=1
3
X
h=1
#
Gh Gi
i=1
i=1
c X 2 X V
ai +
(ai G
2
Gi
Outline
Introduction
The model
Bibliography
Cooperative Game
Maximization on the right side yields

( V (G )
ai (t) =
1
c
Gi
if
V (G )
Gi > 0
V (G )
Gi 0
if
Outline
Introduction
The model
Bibliography
Cooperative Game
Inserting these optimal advertising rates into the right side of the
HJB equation yields
"
#

n
3
n
n
X
X
1 X V 2 X V
V (G ) =
Gh Gi +
Gi
2c
Gi
Gi
i=1
h=1
i=1
i=1
if ai > 0
#
"
n
3
n
X
X
X V (G )
V (G ) =
Gh Gi
Gi
Gi
i=1
h=1
i=1
if ai = 0
Outline
Introduction
The model
Bibliography
Cooperative Game
We guess that the value function that solves the problem has the
form
!2
n
n
X
X
Gi
= + Y + Y 2
V (G ) = +
Gi +
2
2
i
i=1
Where Y ,
Pn
i=1 Gi .
This means that

n
X
V
=+
Gi = + Y .
Gi
j=1
Outline
Introduction
The model
Bibliography
Cooperative Game
Inserting the value function into the equation, we find that for the
value function to solve the HJB equation, parameters should
satisfy the system
n 2
2c
n
= +
n
c
n 2
=
2 2n
c
=
Outline
Introduction
The model
Bibliography
Cooperative Game
The solution
p
(2nc + c)2 + 8nc
+ c < 0
=
2n

p
c (2nc + c)2 + 8nc
=
>0
2n
c
Where =
c. The optimal advertising strategy for firm i is
ai (Y ) =
+ Y
= /c
Y + Y
c
c
Outline
Introduction
The model
Bibliography
Y (t) =
n
X
i=1
Cooperative Game
n n
Gi (t) =
Y
c
c
Solving the differential equation we get

n n
o
Y (t) = + exp
t
Y0
Outline
Introduction
The model
Bibliography
Time consistency
Outline
1
Introduction
The problem

Risk of failure
The model
Cooperative Game
Time consistency
Bibliography
Outline
Introduction
The model
Bibliography
Time consistency
Profit Allocation
The value function of the players in the grand coalition with their
share of goodwill,
i = V (G N (t))/n,
(6a)

i = + Y (t) + Y (t)2 .
(6b)
n
n
2n
i =
+ GiN + n(GiN )2 .
n
2
Outline
Introduction
The model
Bibliography
Time consistency
Outline
1
Introduction
The problem

Risk of failure
The model
Cooperative Game
Time consistency
Bibliography
Outline
Introduction
The model
Bibliography
Time consistency
Time consistency
An IDP is time consistent if at (G C , t), t [0, ):

Z t
i (V , G , 0) =
e i ( )d + et i (V , G C , t)
0
Outline
Introduction
The model
Bibliography
Time consistency
Denote by i (t) the profit to be allocated to player i N at an

instant of time and (t) = (1 (t), . . . , n (t)) is the vector of profit
allocations. We say that this vector is an imputation distribution
procedure (IDP) if
Z
i (V , G , 0) =
et i (t)dt,
i = 1, . . . , n.
0
Outline
Introduction
The model
Bibliography
Z
i (V , G , t) =
Time consistency
e i ( )d + et i (V , G N , t).
Which can also be stated in terms of i as

i (t) = i (V , G N , t)
d
i (V , G N , t).
dt
Outline
Introduction
The model
Bibliography
Further Reading I
Jrgensen, S., and Gromova, E.

Sustaining cooperation in a differential game of advertising
goodwill accumulation.
European Journal of Operational Research (2016).
Nerlove, M., and Arrow, K. J.
Optimal advertising policy under dynamic conditions.
Economica 29, 114 (1962), 129142.
Outline
Introduction
The model
Bibliography
Further Reading II
Petrosyan, L., and Zaccour, G.

Time-consistent shapley vallue allocation of pollution cost
reduction.
Journal of Economic Dynamics & Control 27, 3 (2003),
381398.

Differential Advertising Oligopoly With RTT

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Outline

Stability of Cooperation on a Differential Game of

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Random Terminal Time

Stability of Cooperation on a Differential Game of Goodwill Accu

the study of mathematical models of conflict and cooperation

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Random Terminal Time

Stability of Cooperation on a Differential Game of Goodwill Accu

Consider an oligopoly of n players competing for sales volume.

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Consider an oligopoly of n players competing for sales volume.

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Consider an oligopoly of n players competing for sales volume.

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Consider an oligopoly of n players competing for sales volume.

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Consider an oligopoly of n players competing for sales volume.

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Firms profit function

Each firm wants to maximize its profit

Subject to the advertising Goodwill

Mario Alberto Garca-Meza

Gi (0) = g0i > 0, i N

Stability of Cooperation on a Differential Game of Goodwill Accu

Since Ti is a r.v., the payoff can be stated as

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

The cost of advertising efforts is given by the function C (ai ), where

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

The sales volume of firm i are given by

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Sales function characteristics

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Sales function characteristics

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Sales function characteristics

< 0 for any k 6= i.

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Therefore, the payoff of agent i is given by

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Random Terminal Time

Stability of Cooperation on a Differential Game of Goodwill Accu

The terminal time of the game is defined by T = min{Ti }. Let

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Let us consider an exponential distribution for Ti , i = 1, . . . , n:

Mario Alberto Garca-Meza

Stability of Cooperation on a Differential Game of Goodwill Accu

Let {Ti }ni=1 be a set of independent random variables with

Where , A , A , A , B , B , B are constants to be determined.