Advertising in a Dynamic Duopoly

In this paper we study the problem of optimal advertising expenditure in a dynamic duopoly. Non-price competition represents a crucial aspect of interfirm rivalry, and in some markets advertising may be considered as one of the most important competitive tools. An important feature of our model is that we consider explicitly the competitive and informative contents of advertising, allowing advertising to have market size and business stealing effects. We use a differential game framework and analyse the open loop and Markov feedback equilibria.