Advertising Strategies in Electronic Retailing: A Differential Games Approach

49 Pages Posted: 5 Oct 2011

See all articles by Dengpan Liu

Dengpan Liu

University of Alabama in Huntsville - College of Business Administration

Subodha Kumar

Temple University - Department of Marketing and Supply Chain Management

Vijay Mookerjee

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: October 5, 2011

Abstract

We consider advertising problems under an IT capacity constraint encountered by electronic retailers in a duopolistic setting. While there is a considerable amount of literature on advertising games between firms, introducing an IT capacity constraint fundamentally changes this problem. In the presence of information processing constraints, while advertising may still cause a customer to switch, it may not result in a sale, i.e., the customer may be lost by both firms. This situation could occur when customers have a limited tolerance for processing delays and may leave the website of a firm because of slow response. In such situations, attracting more traffic to a firm’s website (by increasing advertising expenditure) may not generate enough additional revenue to warrant this expenditure. We use a differential game formulation to obtain closed-form solutions for the advertising effort over time in the presence of IT capacity constraints. Based on these solutions, we present several useful managerial insights.

Keywords: Keywords: IT capacity, Advertising, Optimal control theory, Differential game, Reneging, Nash

Suggested Citation

Liu, Dengpan and Kumar, Subodha and Mookerjee, Vijay, Advertising Strategies in Electronic Retailing: A Differential Games Approach (October 5, 2011). Mays Business School Research Paper No. 2011-1. Available at SSRN: https://ssrn.com/abstract=1939468 or http://dx.doi.org/10.2139/ssrn.1939468

Dengpan Liu (Contact Author)

University of Alabama in Huntsville - College of Business Administration ( email )

Huntsville, AL 35899
United States
2568246826 (Phone)

HOME PAGE: http://cba.uah.edu/is/liu

Subodha Kumar

Temple University - Department of Marketing and Supply Chain Management ( email )

Philadelphia, PA 19122
United States

Vijay Mookerjee

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

P.O. Box 830688
Richardson, TX 75083-0688
United States

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