Dyn Games Appl

DOI 10.1007/s13235-015-0147-1

Defensive, Offensive, and Generic Advertising

in a Lanchester Model with Market Growth

Steffen Jørgensen · Simon-Pierre Sigué

© Springer Science+Business Media New York 2015

Abstract The paper considers a duopolistic market in which firms compete over time through
their respective advertising efforts. In contrast to earlier work in advertising competition,
the paper supposes that each firm may choose among three types of advertising: offensive
advertising which has the purpose of attracting customers from the rival firm, defensive
advertising which aims at protecting a firm’s customer base from the competitors’ attacks, and
generic advertising which aims at enhancing industry sales. We address questions like: How
should an advertising strategy, for each of the three types of advertising effort, be designed?
How would the corresponding time paths of sales look like? The paper uses differential
game theory to answer these questions and provides closed-form analytical expressions for
equilibrium advertising strategies and sales rate paths. It is found that advertising strategies
can be expressed in terms of the shadow prices of the firms’ sales rates and the model
parameters. Two combinations of theses advertising are optimal: all three advertising together
and both offensive and defensive advertising. As to the latter, an essential assumption is that
offensive advertising is more cost-effective than defensive advertising.

Keywords Advertising · Duopolistic market · Differential games

1 Introduction

Business firms competing in growing markets have the choice of targeting their marketing
activities at three different segments: rival firms’ customers, own customers, and poten-
tial customers. Potential customers include former buyers who stopped purchasing the

S. Jørgensen
Department of Business and Economics, University of Southern Denmark,
Campusvej 55, 5230 Odense M, Denmark
e-mail: steffenjorgensen2510@gmail.com

S.-P. Sigué (B)

Faculty of Business, Athabasca University, 1 University Drive, Athabasca,
AB T9S 3A3, Canada
e-mail: simons@athabascau.ca
 Dyn Games Appl

product/service category but may start buying again as well as customers who did not pur-
chase the category yet. Marketing instruments that are used to influence the three segments
include advertising, pricing, personal selling, and customer service. The impacts of market-
ing activities often have a longer-term perspective and should be studied in an intertemporal
setting.
This paper focuses on advertising and investigates how three types of advertising could
be used in a dynamic and competitive market.
Advertising that is mainly targeted at a firm’s own customers is called defensive advertis-
ing, and its goal is to avoid that current customers switch to competing brands. This is done
by creating loyalty and high switching costs. In recent years, there has been an increasing
interest in such strategies as an effective way to reduce a firm’s marketing expenditures, based
on an observation that in many industries it might be considerably cheaper to retain a current
customer than to attract a new one.1
Advertising which aims at attracting rival firms’ customers is known as offensive (or
predatory) advertising , and its purpose is to stimulate brand switching. Offensive campaigns
may, however, turn into battles for market shares that could leave the industry with increased
advertising expenditures without changing market shares very much.
The main goal of generic advertising is to expand demand for the category, mainly by
inducing potential customers to start buying. Generic advertising should benefit all firms
in the industry as it does not promote a particular brand. This type of advertising has been
used for agricultural products, in the early stages of the life cycle of a new product to create
awareness, or in mature markets to promote new uses.2
The concurrent use of all three types of advertising gives a firm a wider range of strategic
marketing options. The choice of an overall strategy that attains an appropriate balance
between different types of advertising is a problem that should be of major interest to firms in
a competitive industry. Previous research has not addressed the strategic interactions between
offensive, defensive, and generic advertising. In a mature market, Erickson [4] and Martín-
Herràn et al. [10] study the design of offensive and defensive strategies, while Bass et al.
[1,2] design offensive and generic advertising strategies in an expanding market.
The current research constructs and analyzes a dynamic advertising game model that
provides recommendations of how firms should design offensive, defensive, and generic
advertising strategies in a growing market.3
For reasons of tractability, we confine our interest to firms that are symmetric, with the
exception of their initial sales rates. We follow the main trend in the literature and consider
a duopolistic market. The aims of the paper are as follows. We wish to
• characterize the conditions, expressed in terms of the model parameters, under which var-
ious combinations of offensive, defensive, and generic advertising emerge as equilibrium
outcomes
• design strategies for each type of advertising, assuming that firms employ strategies that
are is contingent upon observed sales rates and time
• determine the time paths of sales that result from using equilibrium advertising strategies.

1 One example is the telecommunications industry where customer loyalty is relatively low and the cost of
attracting a new customer can be high.
2 A recent example of the use of generic advertising is the European beer market which has been shrinking
in recent years. The trade association “Brewers of Europe” plans a campaign in 2014 to stimulate beer sales
in general. A campaign, named “Let There Be Beer,” ran in 2013 in the UK.
3 Market contraction has been studied, although in a rather stylized fashion in, e.g., Wang and Wu [14],
Espinosa and Mariel [5]. Market contraction is disregarded in the current research.
Dyn Games Appl

For this purpose, we propose an extension of the Lanchester advertising model. Our model
takes into account the three types of advertising, modelled as separate decision variables, and
includes market growth.
The remainder of the paper is organized as follows. Section 2 provides a literature review,
and Sect. 3 presents the advertising differential game model. Section 4 identifies equilibria
of the game presented in Sect. 3, and Sect. 5 concludes.

2 Literature Review

The Lanchester model (see, e.g., Jørgensen and Zaccour [8] for a survey) has often been used
as a stylized representation of advertising competition. The standard Lanchester advertising
model assumes a market of fixed size and describes how firms battle for market share, using
offensive advertising to increase their individual sales to the detriment of their rivals. Using the
Lanchester model as component of a differential game, the researcher’s problem is to deter-
mine how offensive advertising strategies can be chosen such that an equilibrium emerges.
A number of modifications of the basic Lanchester model have been proposed to allow for
more realistic business situations (see Jørgensen and Zaccour [8], Bass et al. [1], and Huang
et al. [7] for reviews). Fruchter [6], Piga [11], and Espinosa and Mariel [5], among others,
relax the assumption of a fixed market size and consider an expanding market. The growth
of the market size is attributed to advertising that plays the role of both offensive and generic
efforts. Bass et al. [1,2] were the first to model generic advertising as a separate decision
variable. Firms invest in offensive advertising to steal customers from each other and generic
advertising to expand the market size. Bass et al. [1] assume an infinite planning horizon,
while Bass et al. [2] use a finite horizon setting.
Erickson [4] and Martín-Herrán et al. [10] consider a market of fixed size and study defen-
sive as well as offensive advertising. Then competitors have the possibility to defend their
customer base as well as attacking rival sales. Martín-Herrán et al. [10] incorporate inter-
action between offensive and defensive marketing. Bass et al. [1,2] also consider defensive
advertising, although not as a separate decision variable. Rather they assume that a certain
proportion of a firm’s overall advertising expenditures is allocated to defensive advertising,
leaving the rest for offensive and generic advertising.
The current research builds on the above extensions of the Lanchester model, in particular
Erickson [4] and Bass et al. [1,2], and suggests a new model to study offensive, defensive,
and generic advertising, all being treated as separate decision variables. This is a proper
generalization of the work by Erickson and Bass et al.

3 Differential Game Model

Our model of advertising competition in a duopolistic market allows a firm to control three
separate types of effort: offensive advertising to attract customers from the rival firm, defensive
advertising to protect the firm’s customer base, and generic advertising to increase industry
sales. Let ai (t), di (t), and gi (t) be the rates of offensive, defensive, and generic advertising
efforts, respectively, of firm i = 1, 2 at time t ∈ [0, T ] where T is the horizon date. Time t
is continuous, and T is fixed and finite.
We assume that firms are symmetric which means that any model parameter has the same
(unspecified) value for both firms, with the exception that initial sales rates are unequal. The
 Dyn Games Appl

case of fully asymmetric firms is analytically intractable due to the relative complexity of the
model, and its investigation would have to resort to numerical simulations.4
Denote by Si (t) the rate of sales of firm i at time t. The evolution of sales over time
is modelled by two differential equations that extend the Lanchester advertising model to
include three types of advertising effort as well as market expansion:
 
Ṡi (t) = f i (ai (t), d j (t)) S j (t) − f j (a j (t), di (t)) Si (t) + h i (g1 (t), g2 (t))
in which i, j ∈ {1, 2} , i  = j. Function f i is called an attraction rate, and—as in Erickson
[4]—we let it depend on a firm’s offensive advertising effort as well as the defensive advertis-
ing effort of the rival firm. Attraction rates must be nonnegative, and their partial derivatives
satisfy the inequalities ∂ f i /∂ai > 0 and ∂ f i /∂d j < 0. Sales rates S1 (t) and S2 (t) enter on
the right-hand side of the sales dynamics in a concave fashion (instead of linearly as in the
standard Lanchester model). The square root formulation implies that effects of advertising
are subject to diminishing marginal returns ([1,2,12]).
Functions h i represent a firm’s share of industry sales growth and depend on generic
advertising efforts of both firms ([1–3]). The growth function h i takes nonnegative values, is
increasing in its arguments, and must satisfy the condition h(0, 0) = 0, i.e., if no firm uses
generic advertising, the market does not grow. This is a simplification because there clearly
are instances where a market grows even if no generic advertising is done.
Remark 1 The sales dynamics proposed in this research generalize those in Erickson [4] to
include market growth and generic advertising. If there is no defensive advertising, our sales
dynamics are the same as in the symmetric case of Bass et al. [1,2].
Following the approach in the majority of the literature on dynamic advertising competi-
tion, we employ specific functional forms for attraction and market growth rates. Our choices
are simple:5
k (g1 + g2 )
f i (ai , d j ) = βai − λd j ; h i (g1 , g2 ) = .
2
in which β and λ are positive constants reflecting the efficiency of offensive and defensive
advertising, respectively. We adopted the market growth component from Bass et al. [1,2]
who, in the case of symmetric firms, allocate to each firm one half of the increase in industry
sales. The parameter k > 0 measures the efficiency of generic advertising efforts. Letting
the market expansion function depend on g1 + g2 is plausible because it is the total generic
advertising efforts that generate market growth.
The unit profit margin of each firm equals m > 0 and is constant. Costs of advertising
efforts are quadratic. This cost function has often been used in the literature, mainly due to its
tractability, and reflects a hypothesis that advertising effort is subject to decreasing marginal
returns. Advertising cost functions are as follows:
ca cd cg
Ca (ai ) = ai2 , Cd (di ) = di2 ; C g (gi ) = gi2 , i = 1, 2
2 2 2
in which ca > 0, cd > 0, cg > 0 are constants.6 We suppose that the period for which
advertising strategies are designed is reasonably short and omits discounting of future profits.
4 For the reason that defensive advertising is absent in their model, Bass et al. [1,2] are able to find analytical
solutions for an asymmetric case.
5 Martín-Herrán et al. [10] also use a linear formulation of attraction rates. Moreover, they include multiplica-
tive interaction between offensive and defensive advertising.
6 In Bass et al. [1,2], offensive and generic advertisings have the same cost function, that is, c = c .
a g
Dyn Games Appl

Given that the horizon is truncated, the problem arises how to assess the value of sales
rates at horizon date T. Following Bass et al. [1,2], we assume that salvage values are zero.
This approximates a situation where firms expect that their product/service has a finite life
cycle, ending at some future date T after which sales are negligible.7 The objective function
of firm i then is
 T  
Ji (ai , di , gi ) = m Si (t) − Ca (ai (t)) − Cd (di (t)) − C g (gi (t)) dt.
0

Advertising and sales rates must satisfy the nonnegativity constraints

ai (t) ≥ 0, di (t) ≥ 0, gi (t) ≥ 0, Si (t) ≥ 0 for all t and i (1)

and attraction rates must take nonnegative values, that is,

f i (ai , d j ) = βai − λd j ≥ 0 for all t and i. (2)

Rather than imposing the requirements in (1) and (2) as constraints on advertising and sales
rates, we shall address the problem when the equilibrium values of these rates have been
determined.

4 A Markovian Nash Equilibrium

To identify Markovian Nash equilibria, define value functions V 1 (t, S1 , S2 ) and V 2 (t, S1 , S2 ).
A value function represents the optimal profit to be earned by a firm during the time interval
[t, T ] , given that the dynamic system is in state (S1 , S2 ) at time t. Equilibria are found by
verifying the existence of continuously differentiable functions V i (t, S1 , S2 ) that solve the
following Hamilton–Jacobi–Bellman (HJB) equations for all t ∈ [0, T ] , Si ≥ 0, i = 1, 2 :

∂V i ca cd cg
− = max m Si − ai2 − di2 − gi2 (3)
∂t ai ≥0, di ≥0, gi ≥0 2 2 2


∂V i 
 k gi + g j
+ (βai − λd j ) S j − βa j − λdi Si +
∂ Si 2


∂V i 
 k gi + g j
+ (βa j − λdi ) Si − βai − λd j Sj +
∂Sj 2

in which d j = d j (t, S1 , S2 ), a j = a j (t, S1 , S2 ), and g j = g j (t, S1 , S2 ) are the Markovian

advertising strategies of firm j. Value functions must satisfy the boundary conditions

V i (T, S1 , S2 ) = 0 for all feasible pairs (S1 , S2 ). (4)

7 A common reason why products and services have a finite lifetime is the emergence of technological
innovations that generate more attractive substitutes.
 Dyn Games Appl

In the sequel, we omit the arguments of a value function when no confusion can arise. The
Hamiltonian maximization conditions are
 
 ∂V i ∂V i ≤0 =0
−ca ai + β S j − ⇐ ai
∂ Si ∂Sj =0 >0
 ∂V i ∂V i

≤0

=0
−cd di + λ Si − ⇐ di
∂ Si ∂Sj =0 >0
i  
k ∂V ∂V i
≤0 =0
−cg gi + + ⇐ gi . (5)
2 ∂ Si ∂Sj =0 >0

The partial derivatives ∂ V i /∂ Si and ∂ V i /∂ S j can be interpreted as shadow prices of sales

rates Si and S j , respectively. Under appropriate regularity conditions, a shadow price is an
adequate approximation of the rate of increase in the value function, per unit of increase in
the associated state variable (here: sales rate). See, e.g., Van Long and Léonard [13].
Consider offensive and defensive advertising. When ai and di are positive, the shadow
prices satisfy the inequality ∂ V i /∂ Si > ∂ V i /∂ S j . This means that a firm will use these two
types of advertising if it yields a higher marginal profit to have a marginal increase in its
own sales rather than in the rival’s sales. This is intuitive. The first expression in (5) then
shows that offensive advertising of a firm increases when the sales rate of the rival increases.8
The intuition is that a firm exploits that its rival has a larger sales rate that can be attacked.
Defensive advertising of a firm increases as its own sales rate increases, reflecting that the
firm then has more to protect.
If the generic advertising rate gi is positive, the inequality ∂ V i /∂ Si + ∂ V i /∂ S j > 0
holds. The interpretation is that if the aggregate effect of a marginal increase in sales rates is
positive, then firms should engage in generic advertising. On the other hand, if, for example,
gi is zero, the inequality ∂ V i /∂ Si + ∂ V i /∂ S j ≤ 0 holds. This means that an increase in at
least one of the sales rates will decrease a firm’s value. In such a case, and since firms are
symmetric, no firm would use generic advertising.

Remark 2 Given the maximization conditions in (5), the issue of nonnegativity of attraction
rates can be addressed. Attraction rates are given by
 

β2 λ2  ∂V i ∂V i
f i ai , d j = βai − λd j = − Sj −
ca cd ∂ Si ∂Sj

which shows that ai = d j = 0 ⇒ f i = 0 which is obvious. If ai > 0, d j > 0, which we

shall prove to be true in equilibrium, attraction rate f i is positive iff

β2 λ2
> . (6)
ca cd

Henceforth, we assume that (6) is satisfied. The inequality means that offensive advertising
is the more cost-effective type of advertising. Whether this is true or not depends on the
institutional characteristics of the specific situation to which the model is applied.

8 This result can also be found in Sorger [12] and Bass et al. [1,2].
Dyn Games Appl

Consider a situation in which all advertising rates are positive. Substituting the strategies
in (5) into the HJB equations yields
2  
∂V i k2 ∂ V i ∂V i k2 ∂ V i ∂V i ∂V j ∂V j
− = m Si + + + + +
∂t 8cg ∂ Si ∂Sj 4cg ∂ Si ∂Sj ∂ Si ∂Sj
2  i 2
1 β λ2 ∂V ∂V i
+ Sj + Si −
2 ca cd ∂ Si ∂Sj
2  i  
β λ2 ∂V ∂V i ∂V j ∂V j
+ Si + Sj − − . (7)
ca cd ∂ Si ∂Sj ∂ Si ∂Sj
In (7), we note that if firms do not use either offensive or defensive advertising, the expressions
in the second and third rows disappear. If firms do not use generic advertising, the second
and third terms in the first row disappear. If no advertising at all is used, the value function
is a simple, linear function of time.
Guided by the structure of the model, we guess that the following value functions solve
the HJB equations:
V i (t, S1 , S2 ) = α(t) + ϕ(t)Si + ψ(t)S j (8)
where α(t), ϕ(t), and ψ(t) are functions to be determined. Partial derivatives of the value
functions are
∂V i ∂V i ∂V j
= α̇(t) + ϕ̇(t)Si + ψ̇(t)S j ; = ϕ(t); = ψ(t)
∂t ∂ Si ∂ Si
which shows that the coefficients ϕ(t) and ψ(t) are the shadow prices of sales rates Si and
S j , respectively. Plugging the above partial derivatives into the HJB equations shows that for
the value functions in (8) to solve the HJB equations, the coefficients α(t), ϕ(t), and ψ(t)
must satisfy the boundary conditions
α(T ) = 0, ϕ(T ) = 0, ψ(T ) = 0 (9)
and solve the differential equations
3k 2
−α̇(t) = (ϕ(t) + ψ(t))2 (10)
8cg
 2 
λ β2
−ϕ̇(t) = m + − (ϕ(t) − ψ(t))2 (11)
2cd ca
 2 
β λ2
−ψ̇(t) = − (ϕ(t) − ψ(t))2 .
2ca cd
Using (9) and (10) shows that the value function coefficient α(t) is positive for t ∈ [0, T ).
For notational simplicity, define two constants
λ2 β2 β2 λ2
C1 = − ; C2 = − .
2cd ca 2ca cd
Invoking the assumption in (6), one can readily show that C1 < 0, C1 + C2 < 0 and
C1 − C2 < 0.

Lemma 3 Solutions of (11) are given by

√
mC2 (T − t) C2 m (C2 − C1 ) 
ψ(t) = − tanh m (C2 − C1 ) (T − t) (12)
C2 − C1 (C1 − C2 )2
 Dyn Games Appl

and √
mC2 (T − t) C1 m (C2 − C1 ) 
ϕ(t) = − tanh m (C2 − C1 ) (T − t) . (13)
C2 − C1 (C1 − C2 ) 2

Proof All proofs are in the “Appendix.”

Using Lemma 1 yields

√
m (C2 − C1 ) 
ϕ(t) − ψ(t) = − tanh m (C2 − C1 ) (T − t)
C1 − C2
which is positive for t ∈ [0, T ), that is, the shadow price of a firm’s own sales is larger
than that of the rival’s sales. Using (5), we conclude that equilibrium offensive and defensive
advertising rates are positive.

Remark 4 If the generic advertising rate is zero, then (10) shows that the value function
coefficient α(t) is constant. Since α(T ) = 0 must hold, we conclude that α(t) then is zero
for all t.

Using (12), (13), and Lemma 1 provides the following proposition which states our results
for the signs of the shadow prices, their sum, and their difference.

Proposition 5 Case 1: C2 > 0. For all t ∈ [0, T ), it holds that

ϕ(t) > ψ(t), ψ(t) > 0, ϕ(t) > 0, ϕ(t) + ψ(t) > 0.
 
Case 2: C2 < 0. Define a constant T̃ as the solution of 2C2 / (C1 + C2 ) = tanh γ T̃ / γ T̃ .
Then the following is true:
For any T : ϕ(t) > ψ(t), ψ(t) < 0 for t ∈ [0, T ).
If T < T̃ : ϕ(t) + ψ(t) > 0 for t ∈ [0, T )
If T > T̃ : ϕ(t) + ψ(t) < 0 for t ∈ [0, t ∗ ], ϕ(t) + ψ(t) > 0 for t ∈ (t ∗ , T ).

The results in Proposition 1 have the following interpretations. The results for Case 1 are
similar to those obtained in Bass et al. [2]. This case is characterized by cd β 2 > 2ca λ2 which
certainly is satisfied when there is no defensive advertising as in the Bass et al.’s papers.
Effectiveness β of offensive advertising is sufficiently high to compensate for a small cost cd
of defensive and/or a large cost ca of offensive advertising, as well as a high efficiency λ of
defensive advertising. Under such circumstances, it pays to attack rival sales and therefore the
shadow price of these sales is positive. Since shadow prices are positive, it is also worthwhile
for firms to engage in generic advertising.
The shadow price ψ(t) of the rival’s sales rate is negative in Case 2. This case is character-
ized by the inequality cd β 2 < 2ca λ2 and occurs if λ and/or ca are large, defensive advertising
is efficient, and/or offensive advertising is costly. In neither of these two situations, a firm
will benefit from an increase in the rival’s sales rate. It still pays for the firms to use both types
of advertising. The sign of shadow price ϕ (t) is ambiguous, and we can only conclude that
it is positive for m > −C1 /C22 . This inequality is valid if the margin m is sufficiently high.
If ϕ(t) happens to be negative, both shadow prices are negative and no generic advertising
is used.

Remark 6 Negative shadow prices do not occur in Bass et al. [2], due to the absence of
defensive advertising. A negative shadow price is encountered in other applications, for
Dyn Games Appl

example, in models of adoption of durable product innovations when the market potential is
fixed. The latter has the effect that any increase in the cumulative number of adopters reduces
the potential for future earnings. This makes the shadow price of a firm’s cumulative sales
negative (see, e.g., Krishnamoorthy et al. [9]).

Equilibrium advertising strategies are characterized in the following proposition which

needs no proof: The results in Proposition 2 follow from (5) and Proposition 1.

Proposition 7 Equilibrium advertising strategies are given by

β

ai t, S j = S j (ϕ (t) − ψ (t)) > 0 for t ∈ [0, T ); ai T, S j = 0

ca
λ
di (t, Si ) = Si (ϕ (t) − ψ (t)) > 0 for t ∈ [0, T ); di (T, Si ) = 0
cd
k (ϕ (t) + ψ(t))
If T < T̃ : g(t) = > 0 for t ∈ [0, T ); g (T ) = 0
2cg
  
0 for t ∈ 0, t ∗
If T > T̃ : g (t) = k(ϕ(t)+ψ(t)) (14)
2cg > 0 for t ∈ (t ∗ , T ), g (T ) = 0.

Offensive and defensive advertising rates are positive, except at t = T where they are
zero. The latter is driven by the assumption of zero salvage values at the horizon date.
As to generic advertising, the case T < T̃ represents a situation in which the time horizon
is relatively short. Then it pays to use generic advertising throughout. If the time horizon is
relatively long, T > T̃ , firms postpone their use of generic advertising until time t ∗ . Taking
time derivatives in (12) and (13) shows that on time intervals where the generic advertising
rate is positive, it first increases and then decreases. The final decrease is due to the absence
of salvage values  
The result that generic advertising is zero during the initial interval of time 0, t ∗ is not
observed in Bass et al. [2] where the generic advertising rate is positive and monotonically
decreasing for all t. Bass et al. motivate their result by stating that the objective of generic
advertising in the earlier stages of the life cycle is to educate consumers about the category.
Thus generic advertising should be highest initially. Our result reflects a strategy that aims
at stimulating industry sales in the later phases of the life cycle where it is often seen that
industry sales grow at a slower rate due to weaker or vanishing exogenous growth drivers.
To finish the characterization of the Markovian equilibrium, it remains to determine the
evolution of sales. For this purpose, insert the equilibrium advertising rates into the sales
dynamics to obtain
Ṡ1 (t) = p(t)S2 (t) − p(t)S1 (t) + q(t) for t ∈ [0, T ]
Ṡ2 (t) = p(t)S1 (t) − p(t)S2 (t) + q(t) for t ∈ [0, T ]
if T < T̃ (15)
 ∗

Ṡ1 (t) = p(t)S2 (t) − p(t)S1 (t) for t ∈ 0, t
 
Ṡ2 (t) = p(t)S1 (t) − p(t)S2 (t) for t ∈ 0, t ∗ (16)
Ṡ1 (t) = p(t)S2 (t) − p(t)S1 (t) + q(t) for t ∈ (t ∗ , T ]
Ṡ2 (t) = p(t)S1 (t) − p(t)S2 (t) + q(t) for t ∈ (t ∗ , T ]
if T > T̃ . (17)
 Dyn Games Appl

In the above differential equations, functions p(t) and q(t) are given by
2 
β λ2
p(t) = − [ϕ (t) − ψ (t)]
ca cd
2 √ 
β λ2 m (C2 − C1 )
=− − tanh m (C2 − C1 ) (T − t) (18)
ca cd C1 − C2
k2
q(t) = [ϕ (t) + ψ(t)]
2cg
 √ √ 
k 2 2mC2 (T − t) (C1 + C2 ) m (C2 − C1 ) tanh m (C2 − C1 ) (T − t)
= − .
2cg C2 − C1 (C1 − C2 )2
(19)
Defining three constants
√ √  

2 3 β2 λ2 k 2 m β 2 cd − 2λ2 ca
γ  m − > 0; θ  −
<0
2 ca cd 3cg λ2 ca − β 2 cd
k 2 (β 2 ca cd2 + λ2 ca2 cd )
η
2 > 0,
9cg λ2 ca − β 2 cd
functions p(t) and q(t) can be written more conveniently as
2γ
p(t) = tanh γ (T − t) > 0
3
q(t) = θ (T − t) + ηγ tanh γ (T − t) .
To characterize the shape of the sales rate trajectories, we make—without loss of generality—
the following assumption:
s10 − s20 > 0 (20)
that is, firm 1 has an initial advantage in terms of sales. The solutions of (15), (16), and (17)
are stated in the following proposition.

Proposition 8 Define a function H (t) by

4γ
(2T −t)

43
(s10 − s20 ) e 3 1 + e−2γ (T −t)
H (t) = 8γ
4 .
2e 3 T
e−2T γ + 1 3
Equilibrium sales rate trajectories are given by
s10 +s20 θ     
S1 (t) = + H (t)+(T θ +γ η) t − t 2 + η ln e−2γ T + 1 −ln 1 + e2γ (t−T )
2 2
s10 +s20 θ 2     
S2 (t) = − H (t)+(T θ +γ η) t − t +η ln e−2γ T + 1 − ln 1 + e2γ (t−T )
2 2
for T < T̃ and t ∈ [0, T ] , (21)
s10 + s20 s10 + s20
S1 (t) = + H (t), S2 (t) = − H (t)
2 2
 ∗
for T > T̃ and t ∈ 0, t , (22)
s10 + s20 θ ∗ 2 

S1 (t) = + H (t) + (t ) − t 2 + (T θ + γ η) t − t ∗
2 2
Dyn Games Appl

    
+ η ln e2γ (t −T ) + 1 − ln 1 + e2γ (t−T )
∗

s10 + s20 θ  ∗
2 

S2 (t) = − H (t) + t − t 2 + (T θ + γ η) t − t ∗
2  2  
+ η ln e2γ (t −T ) + 1 − ln 1 + e2γ (t−T )
∗
(23)
 
for T > T̃ and t ∈ t ∗ , T .

Function H (t) satisfies H (t) > 0, Ḣ (t) < 0, and Ḧ (t) > 0. The following corollary
follows directly from the proposition and needs no proof.

Corollary 9 Given (20), it holds for the sales rate trajectories in (21), (22), and (23) that
S1 (t) > S2 (t) .

For all three cases in Proposition 3, it holds that

S2 (t) = S1 (t) − H (t)
from which it follows that Ṡ2 (t) = Ṡ1 (t) − Ḣ (t) and hence Ṡ2 (t) > Ṡ1 (t) for t ∈ [0, T ). In
view of the initial sales advantage of firm 1, this inequality is quite intuitive: Firm 2 wishes
to catch up with the rival and employs an advertising strategy that makes its sales rate grow
faster than that of the competitor. Nevertheless, the initial sales advantage of firm 1 persists
throughout the game.  
In (22), there is no generic advertising during the time interval 0, t ∗ . Industry sales then
are constant, equal to s10 + s20 , which implies Ṡ1 (t) = − Ṡ2 (t) . Corollary 1 then yields
Ṡ1 (t) < 0 and Ṡ2 (t) >0, that is, the sales rate of firm 1 decreases and that of the competitor
increases for t ∈ 0, t ∗ . It is readily shown that the time path S1 (t) is convex and S2 (t) is
concave. Recall that offensive and defensive advertising effort rates a j (t) and di (t) evolve
qualitatively in the same way as the sales rate Si (t). Given S2 (t) < S1 (t), ( 14) shows that
advertising rates satisfy
a1 (t) < a2 (t) and d1 (t) > d2 (t) for t ∈ [0, t ∗ ].
The intuition here is that firm 1 has the smaller offensive advertising rate because rival sales
are the smaller and hence there is less to attack. Firm 1 has, however, the higher defensive
advertising rate because its own sales are the higher, and hence there is more to defend.
In (21) and (23), sales trajectories contain the term q(t). This makes the sales dynamics
more complicated, and a full, analytic characterization seems out of reach. However, we can
identify the sign of function q(t). If q(t) is negative [positive], it is sufficient for sales rate
S1 (t) [S2 (t)] to decrease [increase]. This will determine the sign of the time derivatives of
sales rates in some, but not all, situations. The evaluation
  
> > >
q(t) 0 ⇔ tanh γ (T − t) = ξ γ (T − t) ⇔ tanh x ξ x, (24)
< < <
where we have defined x  γ (T − t) and a constant ξ given by

θ 2 2λ2 ca − β 2 cd
ξ− 2 = ∈ (0, 1) ,
ηγ cd β 2 + ca λ2
shows that the sign of q(t) depends on the function tanh x/(x), the value of ξ, and the length
of the horizon T. The graph of tanh x/(x) is a bell-shaped curve, having its maximum (equal
to one) for x = 0.
 Dyn Games Appl

We confine our interest to the sales paths given by (21), that is, a situation in which firms
use generic advertising for all t. Proposition 4 below shows that there are two possibilities,
and in both of these the time path of q(t) is S-shaped, first convex and then concave. Clearly,
q(T ) is zero. The proof of Proposition 4 below is straightforward and is left to the reader.
Proposition 10 Consider a case where T < T̃ . Then firms use generic advertising for all t,
and the following is true.
Case (i): Suppose that the time horizon T is sufficiently small and the equality
tanh γ (T − t) = ξ γ (T − t) is satisfied for some t < 0. Then q(t) > 0 for t ∈ [0, T )
and S2 (t) is increasing for all t.
Case (ii): Suppose that the time horizon T is sufficiently large and the equality
tanh γ (T − t) = ξ γ (T − t) is satisfied for some tˆ ∈ (0, T ) . Then q(t) > 0 for t ∈ (tˆ, T )
and q(t) < 0 for t ∈ [0, tˆ), implying that S2 (t) is increasing for t ∈ (tˆ, T ) while S1 (t) is
decreasing for t ∈ [0, tˆ).
The proposition considers the case where T < T̃ , that is, a situation where the planning
horizon is relatively short. In Case (i), the horizon date is additionally constrained and it is
optimal for firm 2 to increase its sales rate throughout the game. In Case (ii), the horizon date
is larger (although it does not exceed T̃ ). What we can say here is that the sales rate of firm
2 increases during some terminal interval of time while sales of firm 1 increases on some
initial interval.

5 Conclusions

The paper has developed an extension of the Lanchester advertising model to study a situa-
tion in which firms in a duopolistic market wish to design equilibrium strategies for generic,
offensive, and defensive advertising. Previous works in the area have studied offensive adver-
tising alone, offensive and defensive advertising, and offensive and generic advertising. Thus,
from an applied point of view, our model provides a wider range of strategic advertising pos-
sibilities to an advertising manager. At the theoretical level, the model generalizes previous
works that accounted for two types of advertising only. Moreover, we have studied the more
demanding case of a finite horizon where previous work mainly has focused upon the infinite
horizon case. We provided closed-form characterizations of Markovian equilibrium adver-
tising strategies and have determined the associated equilibrium sales rate trajectories. In
some, but not all, cases, we ascertain how these trajectories evolve over time.
A main result of the paper is the analytical characterization of equilibrium strategies.
Offensive and defensive advertising rates are positive (except at the horizon date which is
due to the absence of salvage values). Generic advertising rates can either be positive from
the outset or zero initially and positive (increasing and then decreasing) later on.
Two main assumptions of the model are that firms are symmetric, except for their initial
sales rate, and offensive advertising is more cost-effective than defensive advertising. The
assumption of symmetry has been used in previous studies, but clearly is a simplification.
Whether superior cost-effectiveness of offensive advertising is an appropriate assumption
depends on the institutional characteristics of the specific scenario to which the model is
applied. Additionally it was assumed that advertising activities can be divided into three
independent and precisely targeted types of advertising. In real life, one might suspect that
there could be some overlap among offensive and defensive advertising.
The paper has studied a duopoly. This is a simplification that applies in previous work as
well. Despite by no means straightforward, future research could explore the extension to an
Dyn Games Appl

oligopolistic industry with asymmetric firms. Generalizing to an oligopoly seems straightfor-

ward, but an asymmetric model is not analytically tractable and one would have to resort to
numerical simulations. Finally, a question which could deserve further research is how firms
actually can agree on investing in generic advertising, given that they compete on offensive
and defensive efforts. Here some kind of cooperation, perhaps in the spirit of “co-opetition”,
may be required.

6 Appendix: Proofs

Proof of Proposition 1 It has already been proved in Lemma 1 that ϕ(t) > ψ(t) for all t and
in both cases. In Case 1, use (11) to show that ψ̇(t) < 0 for all t ∈ [0, T ] . Since ψ(T ) = 0
must hold, it follows that ψ(t) > 0. The result ϕ(t) > 0 follows directly from (13). Positivity
of both shadow prices leads to ϕ(t) + ψ(t) > 0 which implies a positive generic advertising
rate. In Case 2, we use (11) to show that ψ̇(t) > 0 for all t. Since ψ(T ) = 0, it follows that
ψ(t) < 0 for all t. To prove the remaining results, we need the sign of
2mC2 (T − t)
ϕ(t) + ψ(t) =
C2 − C1
√ √
(C1 + C2 ) m (C2 − C1 ) tanh m (C2 − C1 ) (T − t)
−
(C1 − C2 )2

which, introducing three constants

2mC2  (C1 + C2 ) γ
B1  < 0, γ  m (C2 − C1 ) > 0, B2  <0
C2 − C1 (C1 − C2 )2
and defining h(t) = ϕ(t) + ψ(t), can be written more conveniently as

h(t) = B1 (T − t) − B2 tanh γ (T − t) .

Next we determine the essential properties of function h. It holds that h(T ) = 0 and
 
> 2C2 < tanh γ T
h(0) 0⇔
< C1 + C2 > γT
where 2C2 / (C1 + C2 ) ∈ (0, 1) . The function z (T ) = tanh γ T /(γ T ) is decreasing
and z (T ) ∈ (0, 1) . We conclude
  that there exists a value of T, say T̃ , defined by
2C2 / (C1 + C2 ) = tanh γ T̃ / γ T̃ such that h (0) > 0 if T < T̃ and h (0) ≤ 0 if T ≥ T̃ .9
Function h is strictly concave since

ḧ(t) = −2B2 γ 2 (tanh γ (T − t)) tanh2 γ (T − t) − 1 < 0 for t ∈ [0, T ).

Using the properties derived for function h(t) shows that if T < T̃ , then h(t) is positive
for t ∈ [0, T ).If T > T̃ , then h(t) is negative on an initial interval [0, t ∗ ) and positive on a
terminal interval (t ∗ , T ). Q.E.D.

Proof of Proposition 3 We solve the inhomogeneous equations that apply during time inter-
vals [0, T ] and [t ∗ , T ], respectively. The differential equations for S1 (t) and S2 (t) can be

9 An explicit solution for T̃ as a real number does not exist.

 Dyn Games Appl

transformed into a second-order equation for S1 (t):


ṗ(t) q(t)
S̈1 (t) + 2 p(t) − Ṡ1 (t) = q̇(t) + 2 p(t)q(t) − ṗ(t)
p(t) p(t)
⇔ S̈1 (t) + f (t) Ṡ1 (t) = g(t)

which admits the solution

   
−F(t) −F(t)
S1 (t) = κ1 + κ2 e dt + e e F(t)
g(t)dt dt (25)


where F(t) = f (t)dt and κ1 , κ2 are constants of integration. First we determine the integral
F:
   

ṗ(t) 4γ γ tanh2 γ (T − t) − 1
F= 2 p(t) − dt = tanh γ (T − t) − dt
p(t) 3 tanh γ (T − t)
    4   4γ
= − ln e2γ (t−T ) − 1 + ln e2γ (t−T ) + 1 − ln e2γ (t−T ) + 1 − (2T − t)
3 3
which leads to
−2γ (T −t)
− 1
4γ e +1 3 4γ e−2γ (T −t) − 1
e =e
F 3 (t−2T )
−2γ (T −t)
; e−F = e− 3 (t−2T )
− 1 .
e −1 e−2γ (T −t) + 1 3
Hence
 4γ
4
(2T −t)

−F(t) 3e 1 + e−2γ (T −t) 3
3
κ2 e dt = κ2 . (26)
4γ
 

The next task is to determine the integral e−F(t) e F(t) g(t)dt dt. Here we have


θ (T − t) 1 + e−2γ (T −t) + γ η 1 − e−2γ (T −t)

e F(t)
g(t)dt = 4γ

1 ,
e− 3 (t−2T ) e4γ (t−T ) − 1 e−2γ (T −t) + 1 3


θ (T − t) 1+)e−2γ (T −t) + γ η 1 − e−2γ (T −t)

e−F(t) e F(t) g(t)dt =
e−2γ (T −t) + 1
and then
    
θt2
e−F(t) e F(t) g(t)dt dt = −2T γ η+(T θ + γ η) t − −η ln 1 + e2γ (t−T ) . (27)
2
Using (25), (26), and (27) yields the equilibrium sales rate trajectories:
4γ
(2T −t)

4
3e 3 1 + e−2γ (T −t) 3
S1 (t) = κ1 + κ2 (28)
4γ
θ  
−2T γ η + (T θ + γ η) t − t 2 − η ln 1 + e2γ (t−T )
2
4γ
(2T −t)

4
3e 3 1 + e (t−T ) 3
2γ
S2 (t) = κ1 − κ2
4γ
θ  
−2T γ η + (T θ + γ η) t − t 2 − η ln 1 + e2γ (t−T ) .
2
Dyn Games Appl

 ∗  θ = η = 0 provides the solutions of the homogeneous equations on the interval

Setting
0, t :

4
−F(t) e2μ(2T −t) 1 + e−2γ (T −t) 3
S1 (t) = κ1 + κ2 e dt = κ1 + κ2 (29)
2μ

4
e2μ(2T −t) 1 + e2γ (t−T ) 3
S2 (t) = κ1 − κ2 .
2μ
It remains to determine
  the two constants of integration. First consider the sales rates on the
time interval 0, t ∗ . Use the equations
8γ
43 8γ
43
3e 3 T
1 + e−2γ T 3e 3 T
1 + e−2γ T
s10 = κ1 + κ2 ; s20 = κ1 − κ2
4γ 4γ
to get
s10 + s20 2γ (s10 − s20 )
κ1 = ; κ2 = 8γ
4
2 3e 3 e−2T γ + 1 3
which provides the sales rate trajectories
4γ
4
s10 + s20 (s10 − s20 )e 3 (2T −t) 1 + e−2γ (T −t) 3
S1 (t) = + 8γ
4
2 2e 3 T e−2γ T + 1 3
4γ
4
s10 + s20 (s10 − s20 )e 3 (2T −t) 1 + e2γ (t−T ) 3
S2 (t) = − 8γ
4
2 2e 3 T e−2γ T + 1 3
and their terminal values at time t = t ∗ :
 4
3 (2T −t ) 1 + e−2γ (T −t )
4γ ∗ ∗ 3
∗
s10 + s20 (s10 − s20 )e
S1 t = + 8γ
4
2 2e 3 T e−2γ T + 1 3
 4
(s10 − s20 )e 3 (2T −t ) 1 + e2γ (t −T )
4γ ∗ ∗ 3

∗ s10 + s20
S2 (t ) = − 8γ
4 . (30)
2 2e 3 T e−2γ T + 1 3
The values in (30) serve as initial conditions for the two inhomogeneous equations on the
time interval t ∗ , T . Solutions of the inhomogeneous equations are
4γ
4
s10 + s20 (s10 − s20 ) e 3 (2T −t) 1 + e−2γ (T −t) 3
S1 (t) = + 8γ
4
2 2e 3 T e−2T γ + 1 3
θ    
+ (T θ + γ η) t − t 2 + η ln e−2T γ + 1 − η ln 1 + e2γ (t−T )
2
4γ
4
s10 + s20 (s10 − s20 ) e 3 (2T −t) 1 + e2γ (t−T ) 3
S2 (t) = − 8γ
4
2 2e 3 T e−2T γ + 1 3
θ    
+ (T θ + γ η) t − t 2 + η ln e−2T γ + 1 − η ln 1 + e2γ (t−T )
2
 Dyn Games Appl

for t ∈ [0, T ]
and
s10 + s20      θ

+ η ln e2γ (t −T ) + 1 − ln 1 + e2γ (t−T ) +

∗
S1 (t) = (t ∗ )2 − t 2
2 2
8
4 4
∗

(s10 − s20 )e− 3 T γ e2γ (t−T ) + 1 3 e− 3 γ (t−2T )
+ (T θ + γ η) t − t +
4
2 e−2T γ + 1 3
s10 + s20      θ

+ η ln e2γ (t −T ) + 1 − ln 1 + e2γ (t−T ) +

∗
S2 (t) = (t ∗ )2 − t 2
2 2
− 8
γ
2γ (t−T )
43 − 4 γ (t−2T )

(s10 − s20 )e 3 T
e +1 e 3
+ (T θ + γ η) t − t ∗ −
4
2 e−2T γ + 1 3
 
for t ∈ t ∗ , T .
Q.E.D.

Proof of Lemma 1 Introducing constants

λ2 β2 β2 λ2
C1 = − , C2 = − ,
2cd ca 2ca cd
where C1 < 0, C1 + C2 < 0, C1 − C2 < 0, the system in (11) can be written as
ϕ̇(t) = −m − C1 (ϕ(t) − ψ(t))2 (31)
ψ̇(t) = −C2 (ϕ(t) − ψ(t)) . 2
(32)

Recall that Case 1 is the one where C2 > 0 while C2 < 0 in Case 2. To solve (31) and (32),
we employ a modification of a method used in Bass et al. [2]. Multiplying in (32) by −C1 /C2
yields
C1
− ψ̇(t) = C1 (ϕ(t) − ψ(t))2
C2
and adding this to (31) provides
C1
ϕ̇(t) − ψ̇(t) = −m. (33)
C2
Defining y(t) = ϕ(t) − C1 ψ(t)/C2 , (33) becomes
ẏ(t) = −m ⇒ y(t) = −mt + K
and using the condition ϕ(T ) = ψ(T ) = 0 implies y(T ) = 0. Therefore
y(t) = m(T − t).
Then we have
C1
ϕ(t) = m(T − t) + ψ(t) (34)
C2
which is substituted into (32) to yield
2
C1 − C2
ψ̇(t) = −C2 m(T − t) + ψ(t) .
C2
Dyn Games Appl

This differential equation has the solution

√
mC2 (T − t) C2 m (C2 − C1 ) 
ψ(t) = − tanh m (C2 − C1 ) (T − t)
C2 − C1 (C1 − C2 )2

and substituting ψ(t) into (34) yields

√
mC2 (T − t) C1 m (C2 − C1 ) 
ϕ(t) = − tanh m (C2 − C1 ) (T − t) .
C2 − C1 (C1 − C2 )2

Q.E.D.

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