European Journal of Operational Research 197 (2009) 374–388

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European Journal of Operational Research

journal homepage: www.elsevier.com/locate/ejor

Interfaces with Other Disciplines

An oligopoly model of dynamic advertising competition

Gary M. Erickson *
Michael G. Foster School of Business, University of Washington, Box 353200, Seattle, WA 98195-3200, USA

a r t i c l e i n f o a b s t r a c t

Article history: An oligopoly model is presented that allows the determination of feedback Nash equilib-
Received 19 October 2007 rium advertising strategies for an oligopoly. Analyses of symmetric and asymmetric oligop-
Accepted 11 June 2008 olies with the model show that unit contribution and advertising effectiveness have
Available online 28 June 2008
positive effects on a competitor’s own advertising and steady-state sales, while discount
rate and decay rate have negative effects. An asymmetric analysis further shows that unit
contribution and advertising effectiveness affect positively, and discount rate and decay
Keywords:
rate negatively, a competitor’s rivals’ advertising, but have effects in opposite directions
Marketing
Oligopoly
regarding rivals’ steady-state sales. The symmetric and asymmetric analyses also show
Differential game that steady-state sales per competitor decline with the number of competitors in the oli-
gopoly, while total oligopoly steady-state sales increase. The model is applied empirically
to the triopolistic competition involving Anheuser-Busch, SABMiller, and Molson Coors in
the beer industry.
 2008 Elsevier B.V. All rights reserved.

1. Introduction

Oligopolistic competition is the norm in most industries. Industries and markets typically involve multiple competitors
who directly influence each others’ fortunes with their marketing activities. The study of oligopolies, in particular oligopolies
that involve more than two competitors, is critical to our understanding of the role marketing plays in competitive markets.
It is important, also, to study oligopolistic competition in a dynamic framework. Markets are not static, they change with
time, and viewing competition in a dynamic context allows us to see how competitor strategies are both affected by and
influence changing markets. There is a well-established and continuing interest in the dynamic modeling of marketing com-
petition, and we have learned much about dynamic advertising competition. There is also much more we need to learn.
The present research proposes, analyzes, and applies an oligopolistic model that allows the derivation of a unique feed-
back equilibrium for the advertising strategies of a general n number of competitors. The remainder of the paper is organized
as follows. Section 2 offers a literature review of studies of dynamic advertising competition. Section 3 presents the model,
derives its unique feedback equilibrium, and provides symmetric and asymmetric analyses. Section 4 presents an empirical
application of the basic model, and Section 5 provides conclusions.

2. Literature review

There is a long history of game-theoretic research on advertising strategies in oligopolies, with early research (e.g.
Friedman, 1958; Mills, 1961; Gupta and Krishnan, 1967) studying static markets. More recent years have seen a number
of studies involving dynamic market settings; Erickson (2003) and Jørgensen and Zaccour (2004) provide reviews of this
literature.

* Tel.: +1 206 543 4377.

E-mail address: erick@u.washington.edu

0377-2217/$ - see front matter  2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.ejor.2008.06.023
 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388 375

Two models of the dynamic evolution of demand have been prominent in the research: the Vidale–Wolfe (Vidale and
Wolfe, 1957) and Lanchester (Kimball, 1957) models. The Vidale–Wolfe model can be expressed as follows for a competitor
with sales S and advertising A:
dS
S_ ¼ ¼ bAðN  SÞ  qS; ð1Þ
dt
where N is the maximum sales potential, b is an effectiveness coefficient for advertising, and q is a sales decay parameter.
The Lanchester model concerns dynamic shifts in the market share M of one of two competitors, and can be expressed as
follows:

_ ¼ dM ¼ b A1 ð1  MÞ  b A2 M
M ð2Þ
1 2
dt
in which A1 and A2 are the advertising levels of competitors 1 and 2, respectively, and b1 and b2 are advertising effectiveness
coefficients. Variants of the Vidale–Wolfe and Lanchester models have also been studied. The models (1) and (2) and their
variants are used as foundations for differential-game analysis, with which dynamic Nash equilibrium advertising strategies
are derived.
Most of the research on differential-game analysis of advertising competition has adopted the open-loop Nash equilib-
rium concept, which requires that the competitors commit at the outset to their time-varying advertising strategies. How-
ever, empirical work by Chintagunta and Vilcassim (1992) and Erickson (1992) show that feedback (closed-loop, as in Prasad
and Sethi, 2003, also Markovian, as in Jørgensen and Zaccour, 2004) Nash equilibrium strategies fit advertising patterns bet-
ter than do open-loop strategies. In addition, feedback strategies are subgame perfect, while open-loop strategies are not.
Further, feedback strategies have the desirable feature of allowing advertising strategies to respond to the changing demand
states of the competitors.
A feedback Nash equilibrium can be found for simple competitive situations, in particular, a duopoly with no market
expansion and a zero discount rate, using the Lanchester model (Case, 1979; Chintagunta and Vilcassim, 1992; Erickson,
1992). For more general situations, that involve more than two competitors, the possibility of market expansion, and/or a
positive discount rate, mathematical difficulties hamper the development of feedback strategies. However, there have been
recent encouraging approaches to dealing with these difficulties. One approach is to use numerical analysis to compute feed-
back strategies (Breton et al., 2006; Jarrar et al., 2004). Another, by Fruchter and Kalish (1997) and Fruchter (1999) is to de-
velop for the Lanchester model closed-loop Nash equilibrium strategies which are functions of the initial market share—and
as such the equilibrium strategies are not subgame perfect—as well as time and the current market share. The third approach
of promise is to use a model variant for which feedback strategies can be determined mathematically. Bass et al. (2005)
adopt and extend the Sorger (1989) modification of the Lanchester model
pffiffiffiffiffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffi
_ ¼ b A1 1  M  b A2 M
M ð3Þ
1 2

to develop feedback strategies for generic and brand advertising in a duopoly. The special structure of the Sorger model al-
lows the derivation of the feedback strategies. Chintagunta and Jain (1995) offer empirical analyses using the Sorger (1989)
model and its feedback strategies. The present study is in the spirit of this third approach.
A limitation of existing research is that most of the studies involve duopolies exclusively, i.e. exactly two competitors.
Only a small number of studies consider a general oligopoly. Fruchter (1999) extends the Fruchter and Kalish (1997)
closed-loop concept to a general n-player situation. Dockner and Jørgensen (1992) consider a general oligopoly and a diffu-
sion model, but study only open-loop strategies. Teng and Thompson (1983) numerically analyze open-loop strategies for a
triopoly. Most related to the present research are studies by Prasad and Sethi (2003) and Naik et al. (2008), which offer
extensions of a Sethi monopoly model that allow for the derivation of feedback strategies. Empirical research involving oli-
gopolies has been notably lacking. Analytical and empirical research has generated much insight about duopolies, but little
about oligolopies. The purpose of the present research is to extend our ability to study advertising competition by presenting
and analyzing an oligopoly model, where the number of competitors may exceed two, and for which a unique feedback Nash
equilibrium can be derived, and used to advantage in empirical analysis. As such, the research provides a methodological
contribution to the OR field, in that it extends a well-regarded and often-used foundation model, the Vidale–Wolfe model,
that originated in the OR literature.

3. Model

To be able to study effectively oligopolistic competition in a dynamic framework, we need to be able to identify feedback,
as opposed to open-loop, strategies. The following oligopolistic extension of the Vidale–Wolfe model allows the analytical
derivation of a feedback Nash equilibrium in advertising strategies. Define for competitor i = 1, 2, . . . , n

N maximum sales potential for the market

si si(t) = i’s sales at time t
ai ai(t) = i’s advertising at time t
bi the effectiveness of i’s advertising
376 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388

qi the decay rate of i’s sales

qi i’s unit contribution
ri i’s discount rate.

Consider the following model of dynamic demand for i = 1, . . . , n:

vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u X n
u
s_ i ¼ bi ai tN  sj  qi si : ð4Þ
j¼1

The model (4) is a modified Vidale–Wolfe model with a competitor’s advertising working to attract the untapped potential,
i.e. those customers that do not currently buy from any of the competitors, and where the untapped potential is expressed in
square-root form. It should be observed that the model allows for expansion of the total sales of the oligopolistic compet-
itors, since the level of sales totaled over the competitors is not fixed. A competitor cannot keep its attracted customers
indefinitely, there being a decay in sales proportional to current sales of the competitor. In the model, a competitor does
not attract sales directly from its rivals with its advertising, as in the Lanchester model, but attracts sales lost by its rivals,
and itself, through decay.
The model (4) can be viewed as an oligopolistic and deterministic extension of the monopoly model of Sethi (1983). Other
oligopolistic extensions of Sethi (1983) are provided by Prasad and Sethi (2003) and Naik et al. (2008). The present model
differs from those models in substantial ways. The Prasad and Sethi (2003) model is an extension of the Sorger (1989) mod-
ification of the Lanchester model, involves pure market share competition in which total sales across competitors are fixed—
i.e. market growth is not possible—and models the evolution of market shares differently than the model (4) does sales lev-
els. The Naik et al. (2008) model is one in awareness, not sales or market shares, and the behavioral interpretation of the
sources of the evolution of awareness is quite different from that for sales in the proposed model (4).
Assume that the competitors want to maximize discounted profit over an infinite horizon:
Z 1
max eri t ðqi si  a2i Þ dt: ð5Þ
ai P0 0

In the objective function (5), the cost of advertising is assumed to be quadratic, as in other models (e.g. Sorger, 1989;
Fruchter, 1999; Bass et al., 2005; Naik et al., 2006). An alternative and equivalent formulation of the model is to have
a0i ¼ a2i represent advertising dollars, and interpret (4) in terms of the square root of a0i .

3.1. Feedback equilibrium

The model assumptions (4) and (5), along with initial values of sales si(0), constitute a differential game for n competitors.
The following proposition defines the unique feedback Nash equilibrium for the differential game:
Proposition 1. The unique feedback Nash equilibrium for equations (4) and (5) has advertising strategies as the following function
of the sales levels of the n competitors:
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u X n
b i Di u
tN 
ai ¼ ai ðs1 ; . . . ; sn Þ ¼ sj ; i ¼ 1; . . . ; n; ð6Þ
2 j¼1

where (D1, . . . , Dn) is the unique solution to

! !
b2i 2 X b2j Dj X b2j Dj
D þ ðqi þ r i Þ 1 þ Di  qi 1 þ ¼0 ð7Þ
4 i j–i
2ðqj þ r i Þ j–i
2ðqj þ r i Þ

satisfying Di P 0,i = 1, . . . , n.
The proof of the proposition is in Appendix A.
Numerical analysis is generally needed to solve the system of Eq. (7), for given values of the parameters bi, qi, ri, qi,
i = 1, . . . , n. An observation from (6) in the proposition is that ratios of advertising levels in the feedback equilibrium
ai b Di
¼ i ð8Þ
aj bj Dj

are not dependent on levels of the sales state variables.

Steady-state levels of sales with the feedback strategies in Proposition 1 are shown in matrix form in the following proposition. In
the proposition, s is the n  1 vector of steady-state sales levels, 1n1 is an n  1 vector of ones, and 1nn is an n  n matrix of ones.
Proposition 2. In steady state, the sales levels of the n competitors are

s ¼ NR1 1n1 ; ð9Þ

 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388 377

where
0 2q1
1
b21 D1
0  0
B C
B 2q2 C
B0 b22 D2
 0 C
B C
R ¼ 1nn þ B C: ð10Þ
B .. .. .. .. C
B. . . . C
@ A
2qn
0 0  b2n Dn

The proof is in Appendix A.

Proposition 2 shows that the steady-state sales level of each competitor depends on the parameters for all n competitors.

3.2. Symmetric analysis

When we have n symmetric competitors, i.e. bi = b, qi = q, qi = q, and ri = r for all i = 1, . . . , n, we can obtain closed-form
expressions for feedback advertising strategies and steady-state sales, as in the following proposition:
Proposition 3. With symmetric competitors, the unique feedback equilibrium has the following symmetric advertising strategies:
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u X n
bD u
tN 
ai ¼a ¼
sj ; ð11Þ
2 j¼1

where
sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi!
2 ðn  1Þb2 q ðn  1Þ2 b4 q2
D¼ 2 q  r þ þ ðq þ rÞ2 þ þ nb2 q : ð12Þ
b ð2n  1Þ 2ðq þ rÞ 4ðq þ rÞ2

At steady state, sales for each competitor are

b2 DN
si ¼ s ¼ ; i ¼ 1; . . . ; n: ð13Þ
2q þ nb2 D
The proof is in Appendix A.
Comparative statics, regarding the influence of the parameters of the problem on the constant D, advertising a*, and stea-
dy-state sales s, are shown in Table 1. Derivation of the comparative static results is in Appendix A. We see that the discount
rate r and decay rate q have a dampening effect on advertising and steady-state sales, and the unit contribution q and adver-
tising effectiveness b have an enhancing effect. That is, if a competitors discounts the future to a greater extent, or faces a
higher rate of decay in its sales, it advertises less and achieves a lower steady-state sales level. On the other hand, if the profit
contribution from sales is greater, or if advertising is more effective, a competitor advertises at a higher level, and achieves
higher steady-state sales.
Further, we can determine how steady-state sales s for an individual competitor, as well as total oligopoly sales ns, vary
with the size of the oligopoly, the number of competitors n. We have the following proposition:
Proposition 4. The steady-state sales of a single competitor decline in n if
sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
3 rðq þ rÞ 1 r 2 ðq þ rÞ2
nP þ þ þ ð14Þ
4 b2 q 16 b4 q2
while steady-state sales for the entire oligopoly increase in n for all n.
The proof is in Appendix A.
Proposition 4 indicates that, as long as n is of sufficient size, sales in steady state are smaller for individual competitors
but larger overall, as the number of competitors in the oligopoly increases. With more competitors, the overall market is
larger, but each competitor has a lower sales level.

Table 1
Comparative statics for symmetric competition

r q b q
D ; " ; ;
a* ; " " ;
s ; " " ;

" increase; ; decrease.

378 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388

3.3. Asymmetric analysis

With asymmetric competition, numerical analysis is needed to solve the system of equations (7) to derive the Di con-
stants, equilibrium advertising, and steady-state sales. Comparative statics under asymmetric competition are derived
through numerical analysis of various oligopoly scenarios for which the number of competitors and base values of the
parameters are generated via independent random draws. The probability distributions used in the draws are Poisson (1)
for the number of competitors in addition to two, that is, n = 2 + x, where x is Poisson (1), exponential (1) for ri, qi, bi, and
uniform (0, 1) for qi, i = 1, . . . , n. The simulation exercise yields scenarios that have at least 2 competitors, parameters ri, qi,
and bi that take on a variety of nonnegative values that differ across the competitors in each scenario, and varying values
for qi that differ across competitors in each scenario while being constrained to be between 0 and 1. The market potential
N is kept fixed at a value of 1. In each scenario, the base value of each parameter for each competitor is increased by one
percent, and the effects on own and cross Di, advertising, and steady-state sales are observed. Thirty scenarios appear suf-
ficient to establish the general patterns shown in Table 2. More detail on the results of the numerical analysis of comparative
statics is provided in Appendix B.
In Table 2, the own effects show the same directions as the symmetric comparative statics. That is, discount rate ri and
decay rate qi have a dampening effect on own advertising and steady-state sales, while unit contribution qi and advertising
effectiveness bi have an enhancing effect. For cross effects, discount rate and decay rate also have a dampening effect, and
unit contribution and advertising effectiveness an enhancing effect, on average, on the advertising of other competitors, but
the directions of these effects are reversed for other competitors’ steady-state sales. This reversal for sales results from the
effects on own advertising being considerably larger than on competitor advertising. So, for instance, a larger discount rate
for competitor i has a dampening effect on both i’s and j’s advertising, but a larger effect on i’s own advertising than on j’s; i’s
steady-state sales suffer as a result, which allows j’s sales to improve in steady state, even with a dampened advertising
strategy.
Numerical analysis is also used to investigate how the size of the oligopoly, in terms of the number of competitors, affects
steady-state results. To accomplish this, the number of competitors n is fixed at each 2, 3, up to 10, and parameter values are
drawn randomly, for 10,000 oligopoly scenarios for each n, and mean values across the scenarios for total oligopoly sales and
per-competitor averages sales are computed. The results are shown in Fig. 1. Total oligopoly sales in steady state are a bit
above .5 for a duopoly, and grow toward the maximum potential of 1 as the number of competitors increases. Sales per com-
petitor decline in the number of competitors, and with 10 competitors are about a third of those for duopolistic competitors.
These results are in agreement directionally with the symmetric analysis.
We can also determine numerically the impacts of oligopoly size on advertising and profit in steady state. The results for
advertising are shown in Fig. 2, and the results for profit are shown in Fig. 3.
As shown in Figs. 2 and 3, the patterns for advertising and profit both show growth for the total oligopoly, and decline for
each competitor, as the number of competitors in each oligopoly increases. It is worth noting that per-competitor steady-
state profit with ten competitors is 39% that for a duopoly, while per-competitor steady-state advertising is 54% that for a
duopoly. Further, total oligopoly profit with ten competitors is almost twice that for a duopoly, and total advertising is
2.7 times that for a duopoly.
It is perhaps not surprising that total oligopoly advertising rises with an increasing number of competitors. It is not clear a
priori, though, that advertising per competitor should decline with an increasing number of competitors. As it happens in the
numerical analysis, the average competitor’s advertising strategy as a function of sales levels
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u X n
b i Di u
tN 
ai ¼ ai ðs1 ; . . . ; sn Þ ¼ sj ; i ¼ 1; . . . ; n ð15Þ
2 j¼1

tends to increase, for any particular total sales level, as the number of competitors increases. However, since with more com-
petitors the total sales level at steady state is larger, the untapped potential factor in (6) shrinks, in such amounts that at
steady-state sales levels advertising per competitor declines.
The advertising cost at steady state for the average competitor declines with an increasing number of competitors, but not
to the extent that sales and gross profit do, so per-competitor profit in steady state decreases with the number of competitors.

Table 2
Numerically derived comparative statics for asymmetric competition

ri qi bi qi
Di ; " ; ;
Dj ; " " ;
ai ; " " ;
aj ; " " ;
si ; " " ;
sj " ; ; "

" increase; ; decrease; j – i.

 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388 379

1
0.9
0.8

steady-state sales
0.7
0.6
total
0.5
0.4
per competitor
0.3
0.2
0.1
0
2 3 4 5 6 7 8 9 10
number of competitors

Fig. 1. Steady-state sales and number of competitors.

0.9

0.8
steady-state advertising

0.7

0.6

0.5

0.4
total
0.3 per competitor
0.2

0.1

0
2 3 4 5 6 7 8 9 10
number of competitors

Fig. 2. Steady-state advertising and number of competitors.

1.2

1
steady-state profit

0.8

total
0.6
per competitor
0.4

0.2

0
2 3 4 5 6 7 8 9 10
number of competitors

Fig. 3. Steady-state profit and number of competitors.

Total oligopoly profit increases, though, with increased total sales and gross profit levels and a smaller increase in total adver-
tising costs, as the number of competitors in the oligopoly increases.

4. Empirical application

The proposed model is used to study empirically the beer industry, which is a triopoly (Nelson, 2005), with
Anheuser-Busch, SABMiller, and Molson Coors (Coors and Molson merged in 2005) as the three competitors who dominate
the US beer market. Fig. 4 shows case shipments of the three brewers, and Fig. 5 shows advertising expenditures in 1989
dollars. Anheuser-Busch, in particular, continues to lead in shipment volume, and appears to be strengthening its lead in re-
380 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388

1500

mm cases
1000

500

03
04
05
06
90
91

93
94

96
97
98
99
00
01
02
89

92

95
19

19

19

19

20
20
20
20
20
19

19
19

19
19

19
19

20
20
year
Anheuser-Busch Miller Coors

Fig. 4. Beer shipments.

400

300
1989 $ mm

200

100

0
89
90

92
93

95
96
97

99
00
01
02
03
04

06
91

94

98

05
19

19

19

20

20
19
19
19

19
19

19
19
19

20
20

20
20
20
year
Anheuser-Busch Miller Coors

Fig. 5. Beer advertising.

cent years. Anheuser-Busch is also the leading advertiser, and it would appear that its advertising is effective, but that is an
empirical question.
Application of the dynamic oligopoly advertising model to the beer triopoly allows insights into the nature and effects of
the advertising competition, and emphasizes how the model can be useful in an empirical context that involves multiple
competitors. For estimation, a system of 2n equations is developed from the model of sales dynamics (4) and the feedback
Nash equilibrium advertising strategies (6). Subscripts t and t  1 are used to denote discrete time periods. The sales evolu-
tion equations (4) are discretized, and error terms are added, to create n demand equations
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u X n
u
Dsit ¼ sit  sit1 ¼ bi ait tN  sjt1  qi sit1 þ eit ; i ¼ 1; . . . ; n: ð16Þ
j¼1

The n advertising equations, adapted from (6) with error terms added, are
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u X n
bi Di u
tN 
ait ¼ sjt1 þ /it ; i ¼ 1; . . . ; n: ð17Þ
2 j¼1

The error terms in (16) and (17) are assumed to i.i.d. normal for each equation, but allowed to be correlated contemporane-
ously across equations.
The Di along with bi, qi, and N are treated as parameters to be estimated. Parameters qi and ri cannot be identified through
estimation, since they enter the model only through the Di in the advertising equations, and due to the nature of the rela-
tionships in (7), the pseudoregressors for the qi and ri are perfectly correlated. An additional step is undertaken to obtain
values for qi and ri. Values for one of the parameters, across the competitors, are developed from various sources, and those
along with estimated values for Di, bi, and qi are used to infer values for the other parameter through the relationships in (7).
Further details are provided in the discussion of the estimation results.
It is possible, even likely, that the advertising variables are correlated with the error terms in (16), since, after all, adver-
tising is endogenous. To ensure consistent estimates, instrumental variables are used; details on the instruments used is pro-
vided in the discussion of the empirical analysis.
 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388 381

Annual data on shipments in cases and advertising expenditures from 1990 through 2003 are obtained from Nelson
(2005), who gathered the data from various editions of Beer Handbook and Beer Industry Update. The data are supplemented
by figures from Advertising Age on advertising of the three competitors in 2006, 2005, 2004, and 1989 as well as shipments
for 1989, and Beer Marketer’s INSIGHTS for 2004, 2005, and 2006 shipments. Advertising amounts are in 1989 dollars. Sum-
mary statistics on the data are shown in Table 3. Since the advertising amounts are advertising costs for the competitors, the
advertising values shown in Table 3 and used in the estimation of the system (16),(17) are the square roots of the advertising
dollar amounts.
Nonlinear three-stage least squares estimation of the model (16) and (17) shows the results for the beer industry in Table 4.
Instruments used are lagged advertising for each of the three competitors, lagged shipments for the three competitors, a con-
stant vector, time, time squared, and time cubed. R-squared values for first-stage regressions of advertising on the instru-
ments are .685 for Anheuser-Busch advertising, .794 for Miller, and .857 for Coors. All of the estimates in Table 4 are
significant at the .05 level (one-tail test), with the exception of Anheuser-Busch’s decay rate estimate which is significant
at the .10 level.
The estimates of the advertising effectiveness parameters bi in Table 4 show Anheuser-Busch to be the most effective at
attracting new sales through its advertising, with Miller close behind, and Coors the least effective. Also, the estimates for qi
show that Anheuser-Busch apparently has the lowest decay rate for its sales, followed by Coors and Miller.
Estimated values for the Di from Table 4 are used to gain insight into the discount rates ri used by the three competitors. In
the beer industry, reasonably good values for unit contribution qi can be ascertained from the firms’ financial data on gross
profits and unit shipments, since beer is the primary product for Anheuser-Busch, the only product for Coors, and financial
data for Miller is offered separately in the annual financial reports of its owners, Philip Morris and SAB. Where possible, an-
nual reports from the period 1989 through 2006 are used to discern unit contribution values, although only 2001 through
2006 are currently available for Anheuser-Busch. Also, the year 2002 is not considered for Miller, that being the year of sale
from Philip Morris to SAB, and 2005 is not used for Coors, that being the year of merger with Molson. The unit contributions
are deflated to 1989 dollars, and averaged over the years considered. Average values of qi calculated for the three competitors
are 1.973 for Anheuser-Busch, 2.169 for Miller, and 1.878 for Coors. With these qi values, the relationships (7) are used to
infer values for the discount rates, which are .3006 for Anheuser-Busch, .2898 for Miller, and .1869 for Coors.
The parameter estimates for the competitors in the beer industry provide insight into the nature of the dynamic compe-
tition in that industry. Anheuser-Busch is estimated to be the most effective both at increasing sales through its advertising
and maintaining their sales levels. Miller and Coors lag behind on both measures. This provides a basic explanation for the
relative dominance of Anheuser-Busch—having a 63% share of the total shipments for the three competitors in 2006—as
the strongest competitor among the three. The inferred discount rates for the three competitors indicate that Anheuser-Busch,
with the highest discount rate value, appears to be the most myopic of the three. This may seem to be at odds with
Anheuser-Busch’s relative success at both attracting sales maintaining those sales levels; they are strongest of the three com-
petitors in terms of long-term success, yet they discount the future most heavily. Further, all three calculated discount rates

Table 3
Descriptive statistics

Variable Mean Standard deviation

Change in Anheuser-Busch sales 19.294 22.931
Change in Miller sales 3.294 11.761
Change in Coors sales 4.059 8.678
Anheuser-Busch advertising 15.784 .931
Miller advertising 13.388 1.222
Coors advertising 10.635 .725
Total lagged sales 2120.029 107.043

Table 4
Estimation results

Parameter Estimate (Standard error)

Anheuser-Busch Miller Coors
b .12841 .11345 .07370
(.05960) (.03657) (.02434)
q .06129 .13186 .11584
(.04071) (.02678) (.03475)
D 5.17823 4.98157 6.07256
(2.77891) (1.04672) (1.63945)
N 4371.13
(1016.28)
Number of observations 17
Criterion 70.4064
382 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388

appear high as annual discount rates. What this probably indicates is that advertising expenditures are looked on less as
investments than as spending for the short term; advertising, after all, is considered an expense item for each of the three
competitors.
As an alternative empirical specification, Appendix C shows the results for an estimation which does not include the
advertising equations, i.e. only the demand equations are estimated. The results in Appendix C are inferior to those for
the full model estimated in Table 4. In particular, the estimates for both advertising effectiveness and decay rate for
Anheuser-Busch are not stastically significant in the alternative estimation.

5. Conclusions

The dynamic oligopoly model developed here expands our ability to study oligopolistic advertising competition. With the
model, we are able to investigate, with feedback Nash equilibrium advertising strategies, dynamic advertising competition in
more general competitive settings than heretofore allowed. Analytical and numerical analyses of the model provide insights
about the impact of parameters and oligopoly size on advertising competition and outcomes. The empirical application
shows how the model can be useful in understanding competitive interactions in a particular oligopoly situation.
Beyond its methodological contribution, the model can also contribute to practice. Oligopolistic competition is a fact of
life in most industries. The model offers a framework that can be used for both analytical and empirical study of the realities
and implications of the competition involving advertising in a firm’s market.
A possible extension of the model could be to include the influence of additional promotional activities beyond advertis-
ing. It may be useful, for instance, to consider promotional activity that results in only a short-term effect, along with adver-
tising that is assumed to have a long-term impact.
We still have much to learn about advertising competition. To date, the competitive settings we have been able to analyze
have been limited. The model advanced here is a means that can allow the relaxation of limitations and expansion of the set
of competitive scenarios that we are able to study.

Appendix A

Proof of Proposition 1. The Hamilton–Jacobi–Bellman equation for firm i = 1, . . . , n is

2 0 vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 13
u
Xn
oV i @ u X n
ri V i ¼ max 4qi si  a2i þ bj aj tN  sk  qj sj A5: ðA:1Þ
ai
j¼1
osj k¼1

The first order condition for the maximization implies

vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u
bi u X n
oV i
ai ¼ tN  sk ðA:2Þ
2 k¼1
osi

and
!  ! !
b2i Xn
oV i
2 Xn
b2j Xn
oV i oV j oV i
r i V i ¼ q i si  N sk þ N sk  qj sj : ðA:3Þ
4 k¼1
osi j¼1
2 k¼1
osj osj osj

Say Vi is a linear function of the sales levels of the competitors,

X
n
V i ¼ Ai þ Bij sj : ðA:4Þ
j¼1

We determine Ai and Bij so that (A.3) is satisfied, i.e.

! ! !
X
n
b2i Xn Xn
b2j Xn
r i Ai þ r i Bij sj ¼ qi si  N sk B2ii þ N sk Bij Bjj  qj sj Bij : ðA:5Þ
j¼1
4 k¼1 j¼1
2 k¼1

This results in
!
N b2i B2ii X 2
r i Ai ¼ þ bj Bij Bjj ; ðA:6Þ
2 2 j–i
2
b2i B2ii X bj Bij Bjj
ri Bii ¼ qi    qi Bii ; ðA:7Þ
4 j–i
2

b2i B2ii X b2k Bik Bkk

ri Bij ¼    qj Bij : ðA:8Þ
4 k–i
2
 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388 383

We have from (A.7) and (A.8) that

ri ðBii  Bij Þ ¼ qi  qi Bii þ qj Bij ðA:9Þ

so that

ðqi þ r i ÞBii  qi
Bij ¼ ðA:10Þ
qj þ ri
and therefore that, substituting (A.10) into (A.7) and rearranging,
! !
b2i 2 X b2j Bjj X b2j Bjj
B þ ðqi þ ri Þ 1 þ Bii  qi 1 þ ¼ 0: ðA:11Þ
4 ii j–i
2ðqj þ r i Þ j–i
2ðqj þ r i Þ

Define
X b2j Bjj
Ci  1 þ ðA:12Þ
j–i
2ðqj þ r i Þ

so that, solving for Bii,

 qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2
Bii ¼ C i ðq i þ r i Þ  C 2i ðqi þ r i Þ2 þ b2i C i qi : ðA:13Þ
b2i
Given Bjj P 0 "j – i, there is precisely one root that is positive:
 qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2
Bii ¼ C i ðq i þ r i Þ þ C 2i ðqi þ r i Þ2 þ b2i C i qi : ðA:14Þ
b2i
From the first order conditions (A.2),
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u
bi Bii u X n
ai ¼ tN  sk : ðA:15Þ
2 k¼1

Substituting Di for Bii, we have the result in Proposition 1. h

Proof of Proposition 2. With the feedback advertising strategies from Proposition 1, sales dynamics are as follows for
i = 1, . . . , n:
!
b2 Di Xn
s_ i ¼ i N sj  qi si ; ðA:16Þ
2 j¼1

where Di, i = 1, . . . , n, are determined as in Proposition 1. Steady state is achieved when s_ i ¼ 0, which leads to the following
system of linear equations:

2qi X
n

2
si þ sj ¼ N; i ¼ 1; . . . ; n ðA:17Þ
bi Di j¼1

or, in matrix notation,

Rs ¼ N1nx1 ; ðA:18Þ
which leads directly to the result given for steady-state sales. h

Proof of Proposition 3. With equal values of the parameters across competitors, it is straightforward to show that the Di in
Proposition 1 take on a common value D, and we have that
!
b2 ð2n  1Þ 2 ðn  1Þb2 q
D þ qþr Dq¼0 ðA:19Þ
4 2ðq þ rÞ

the unique positive root of which is the quantity (12) given in Proposition 3. At steady state, we have that
!
b2 D Xn
s_ i ¼ N sj  qsi ¼ 0 ðA:20Þ
2 j¼1

implying
384 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388

!
b2 D Xn
si ¼ N sj ðA:21Þ
2q j¼1

and
X
n
nb2 DN nb2 D X
n
si ¼  sj ðA:22Þ
i¼1
2q 2q j¼1

so that
X
n
nb2 DN
si ¼ ðA:23Þ
i¼1 2q þ nb2 D

and
!
b2 D nb2 DN b2 DN
si ¼ N ¼ :  ðA:24Þ
2q 2q þ nb2 D 2q þ nb2 D

Comparative Statics for Symmetric Competition. Define the following expressions:

sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
ðn  1Þb2 q ðn  1Þ2 b4 q2
E  q  r þ þ ðq þ rÞ2 þ nb2 q þ ; ðA:25Þ
2ðq þ rÞ 4ðq þ rÞ2
sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
ðn  1Þ2 b4 q2
F  ðq þ rÞ2 þ nb2 q þ ðA:26Þ
4ðq þ rÞ2
so that
!
2 ðn  1Þb2 q 2
D¼ 2 E¼ 2 q  r þ þF : ðA:27Þ
b ð2n  1Þ b ð2n  1Þ 2ðq þ rÞ

We have that
!
oE ðn  1Þb2 q 1 ðn  1Þ2 b4 q2
¼ 1  þ 2ðq þ rÞ  ðA:28Þ
or 2ðq þ rÞ2 2F 2ðq þ rÞ3

and

oE ðn  1Þb2 q ðn  1Þ2 b4 q2
F ¼ F  2
Fþqþr 60 ðA:29Þ
or 2ðq þ rÞ 4ðq þ rÞ3
so that oE/or 6 0 since F P q + r P 0. Also,
!
oE ðn  1Þb2 1 2 ðn  1Þ2 b4 q
¼ þ nb þ P0 ðA:30Þ
oq 2ðq þ rÞ 2F 2ðq þ rÞ2

and
!
oE ðn  1Þbq 1 ðn  1Þ2 b3 q2
¼ þ 2nbq þ P 0: ðA:31Þ
ob qþr 2F ðq þ rÞ2

Further,
!
oE ðn  1Þb2 q 1 ðn  1Þ2 b4 q2
¼ 1  þ 2ð q þ rÞ  ðA:32Þ
oq 2ðq þ rÞ2 2F 2ðq þ rÞ3

and

oE ðn  1Þb2 q ðn  1Þ2 b4 q2
F ¼ F  Fþqþr 60 ðA:33Þ
oq 2ðq þ rÞ2
4ðq þ rÞ3
so that oE/oq 6 0 since F P q + r P 0.
From (A.27), we have for x = r, q, q,
oD 2 oE
¼ ðA:34Þ
ox b2 ð2n  1ÞÞ ox
 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388 385

so that oD/ox has the same sign as oE/ox. For oD/ob, we have that
oE
oD 2b ob  4E
¼ 3 ; ðA:35Þ
ob b ð2n  1Þ
b3 ð2n  1Þ oD oE
¼ b  2E
2 ob ob
!
1 ðn  1Þ2 b4 q2
¼ 2nb2 q þ þ 2ðq þ rÞ  2F; ðA:36Þ
2F ðq þ rÞ2

and

b3 ð2n  1Þ oD nb2 q ðn  1Þ2 b4 q2 2F 2 nb2 q

F ¼ þ þ 2F  ¼ 2F  2ðq þ rÞ  : ðA:37Þ
2ðq þ rÞ ob q þ r 2ðq þ rÞ 3 q þ r q þr

Now
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
!2 ffi
u
u nb2 q b4 q2
F¼ t qþrþ  ð2n  1Þ ðA:38Þ
2ðq þ rÞ 4ðq þ rÞ2

so that

nb2 q
F 6qþrþ ðA:39Þ
2ðq þ rÞ
and therefore that
oD
6 0: ðA:40Þ
ob
For advertising, we have
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
u X n u X n
bD u
 tN  E u
tN 
a ¼ sj ¼ sj : ðA:41Þ
2 j¼1
bð2n  1Þ j¼1

For x = r,q, q, we have

sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
P n
N  sj
oa j¼1 oE
¼ ðA:42Þ
ox bð2n  1Þ ox

so that oa*/ox has the same sign as oE/ox. For oa*/ob, we have
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
P
oa N  nj¼1 sj b oE  E
ob
¼
ob 2n  1 b2
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
P ! !
N  nj¼1 sj ðn  1Þb2 q 1 ðn  1Þ2 b4 q2 ðn  1Þb2 q
2
¼ 2 þ 2nb q þ þqþr F ðA:43Þ
b ð2n  1Þ qþr 2F ðq þ rÞ2 2ðq þ rÞ

and
!
b2 ð2n  1Þ oa ðn  1Þ2 b4 q2 ðn  1Þb2 q
F sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ¼ nb2 q þ þ q þ r þ F  F2
P n ob 2ðq þ rÞ2 2ðq þ rÞ
N  sj
j¼1

ðn  1Þ2 b4 q2 ðn  1Þb2 q
¼ þ F þ ðq þ rÞðF  q  rÞ P 0 since F P q þ r: ðA:44Þ
4ðq þ rÞ2 2ðq þ rÞ

Finally, for steady-state sales, we have the following relationship:

b2 ND NE
s¼ ¼ : ðA:45Þ
2q þ nb2 D qð2n  1Þ þ nE
386 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388

For x = r, q, b,
os qð2n  1ÞN oE
¼ ðA:46Þ
ox ðqð2n  1Þ þ nEÞ2 ox

so that os/ox has the same sign as o E/ox. For os/oq, we have
 
os Nð2n  1Þ oE
¼ q  E 60 ðA:47Þ
oq ðqð2n  1Þ þ nEÞ2 oq

since oE/oq 6 0 and E P 0. h

Proof of Proposition 4. We have

os qð2n  1ÞN on
oE
 NEð2q þ EÞ
¼ ðA:48Þ
on ðqð2n  1Þ þ nEÞ2
so that

ðqð2n  1Þ þ nEÞ2 os oE
¼ qð2n  1Þ  2qE  E2
N on on
!
qð2n  1Þ ðn  1Þb4 q2 ðq þ 2rÞb2 q ðn  1Þ2 b4 q2
¼ b2 q þ  2rðq þ rÞ  
2F 2ðq þ rÞ 2 2ðq þ rÞ 2ðq þ rÞ2
!
2
ðn  1Þb q
þ 2r  F: ðA:49Þ
qþr
Further,
! !
ðqð2n  1Þ þ nEÞ2 os qð2n  1Þ 2 ðn  1Þb4 q2 ðq þ 2rÞb2 q ðn  1Þ2 b4 q2
F ¼ b qþ  2rðq þ rÞ þ þ F
N on 2 2ðq þ rÞ2 2ðq þ rÞ 2ðq þ rÞ2
!
ðn  1Þb2 q 2
þ 2r  F
qþr
ðq þ 2nr þ 2rÞb2 q ðqð2n2  n  1Þ þ 2rðn2  1ÞÞb4 q2 ðn  1Þ3 b6 q3
¼ 2rðq þ rÞ2 þ  
2 4ðq þ rÞ2 4ðq þ rÞ3
!
ðq þ 2rÞb2 q ðn  1Þ2 b4 q2
 2rðq þ rÞ þ þ F: ðA:50Þ
2ðq þ rÞ 2ðq þ rÞ2
Now, F P q + r  (n  1)b2q/2(q + r), so that
!
ðqð2n  1Þ þ nEÞ2 os b2 q ð2n  1Þðn  1Þb2 q
F 6 rð4n  3Þ  : ðA:51Þ
N on 2 qþr
The quantity on the rhs of (A.51) is nonpositive iff

f ðnÞ  2b2 qn2  ð3b2 q þ 4rðq þ rÞÞn þ b2 q þ 3rðq þ rÞ P 0: ðA:52Þ

The quadratic function is convex, and has roots
sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
3 rðq þ rÞ 1 r 2 ðq þ rÞ2
n¼ þ  þ ðA:53Þ
4 b2 q 16 b4 q2
so that os/on 6 0 if nP the larger root.
For total oligopoly sales, we have

o qð2n  1ÞnN on
oE
 qNE
ns ¼ ðA:54Þ
on ðqð2n  1Þ þ nEÞ2
so that
!
ðqð2n  1Þ þ nEÞ2 o oE nð2n  1Þ 2 ðn  1Þb4 q2 ð2n2  2n þ 1Þb2 q
ns ¼ nð2n  1Þ  E ¼ b qþ þqþrþ F ðA:55Þ
qN on on 2F 2ðq þ rÞ2 2ðq þ rÞ

and
 G.M. Erickson / European Journal of Operational Research 197 (2009) 374–388 387

!  2  !
ðqð2n  1Þ þ nEÞ2 o nð2n  1Þ 2 ðn  1Þb4 q2 2n  2n þ 1 b2 q
F ns ¼ b qþ þ q þ r þ F  F2
qN on 2 2ðq þ rÞ2 2ðq þ rÞ
!
ð2n2  2n þ 1Þb2 q nð2n  3Þb2 q
¼ qþrþ F  ðq þ rÞ2 þ
2ðq þ rÞ 2
ð2n3  4n2 þ 3n  1Þb4 q2
þ : ðA:56Þ
4ðq þ rÞ2
Since F P q + r  (n  1)b2q/2(q + r), we have
ðqð2n  1Þ þ nEÞ2 o
F ns P b2 q P 0:  ðA:57Þ
qN on

Appendix B

Table B1. Mean percentage change due to a one percent change in the parameter

ri qi bi qi
Di .503 +.923 .153 .351
Dj .006 +.019 +.021 .009
ai .503 +.923 +.835 .351
aj .006 +.019 +.021 .009
si .476 +.745 +1.495 1. 073
sj +1. 046 .161 .322 +.223
j – i.

Table B2. Percentage of cases in directional agreement with the sign of the mean effect

ri qi bi qi
Di 100 100 100 100
Dj 97.6 91.8 94.7 97.1
ai 100 100 100 100
aj 97.6 91.8 94.7 97.1
si 100 100 100 100
sj 100 100 100 100
j – i.

Appendix C

Table C1. Alternative estimation results

Parameter Estimate (Standard error)

Anheuser-Busch Miller Coors
b .12824 .21229 .10194
(.08065) (.05265) (.04748)
q .03414 .15855 .10126
(.03364) (.03054) (.04147)
N 3065.24
(452.04)
Number of observations 17
Criterion 37.9907

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