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Three-stage entry game: The strategic effects of advertising

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Author(s): Kuzmanović Marija | Kovačević-Vujčić Vera | Martić Milan

Journal: Yugoslav Journal of Operations Research
ISSN 0354-0243

Volume: 21;
Issue: 2;
Start page: 163;
Date: 2011;
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Keywords: three-stage entry game | advertising | strategic investment | over-investment | market equilibrium | entry deterrence | entry accommodation

ABSTRACT
This paper analyzes the effects of investment in advertising in the three-stage entry game model with one incumbent and one potential entrant firm. It is shown that if a game theory is applied, under particular conditions, advertising can be used as a strategic weapon in the market entry game. Depending on the level of the advertising interaction factor, conditions for over-investment in advertising for strategic purposes are given. Furthermore, three specific cases are analyzed: strictly predatory advertising, informative advertising and the case when one firm’s advertising cannot directly influence the other firm's profit. For each of them, depending on the costs of advertising and marginal costs, equilibrium is determined, and conditions under which it is possible to deter the entry are given. It is shown that if the value of the advertising interaction factor increases, power of using advertising as a weapon to deter entry into the market decreases. Thus, in the case of informative advertising, advertising cannot be used as a tool for deterring entry into the market, while in the case of predatory advertising, it can. Also, we have proved that in the case of strictly informative advertising an over-investment never occurs, while in the two other cases, there is always over-investment either to deter or to accommodate the entry.
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