Optimal Pricing and Advertising in a Durable-Good Duopoly

European Journal of Operational Research, Vol. 200, No. 2, pp. 486-497, January 2010

33 Pages Posted: 2 Apr 2008 Last revised: 28 May 2010

See all articles by Anand Krishnamoorthy

Anand Krishnamoorthy

University of Central Florida

Ashutosh Prasad

University of California, Riverside (UCR)

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: January 1, 2009

Abstract

This paper analyzes dynamic advertising and pricing policies in a durable-good duopoly. The proposed infinite-horizon model, while general enough to capture dynamic price and advertising interactions in a competitive setting, also permits closed-form solutions. We use differential game theory to analyze two different demand specifications - linear demand and isoelastic demand - for symmetric and asymmetric competitors. We find that the optimal price is constant and does not vary with cumulative sales, while the optimal advertising is decreasing with cumulative sales. Comparative statics for the results are presented.

Keywords: Optimal Control, Dynamic programming, Game theory, Differential games, Pricing, Advertising, Nash equilibrium, the Sethi model, Durable goods, Innovative products

JEL Classification: M3, M31, M37, C71, C73, D4

Suggested Citation

Krishnamoorthy, Anand and Prasad, Ashutosh and Sethi, Suresh, Optimal Pricing and Advertising in a Durable-Good Duopoly (January 1, 2009). European Journal of Operational Research, Vol. 200, No. 2, pp. 486-497, January 2010. Available at SSRN: https://ssrn.com/abstract=1114989

Anand Krishnamoorthy (Contact Author)

University of Central Florida ( email )

College of Business Administration
4000 Central Florida Blvd.
Orlando, FL 32816-1400
United States

Ashutosh Prasad

University of California, Riverside (UCR)

900 University Avenue
Riverside, CA 92521
United States

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

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