Dynamic Duopolistic Competition with Sticky Prices and Advertising in Product Differentiation Market: A Feedback Nash Equilibrium

This paper develops a differential duopolistic game model of optimal sticky prices and advertising in product differentiation market, and investigates the feedback Nash equilibrium of dynamic price and advertising interactions in a competitive setting. Specifically, we have made two contributions with respect to the available literature. First, we have proposed the new assumption of the price adjustment speed is decided by the goodwill levels that are composed of consumer preference structure, the levels of the product differentiation and advertising expenditures, which extend the assumptions in existing literature. Second, we investigate how good differentiation, advertising and price stickiness interact in shaping the feedback Nash equilibrium allocation, and obtain the following three conclusions. First, the feedback Nash equilibrium output is increasing in product differentiation, price stickiness, and promotional efficiency. Second, the feedback Nash equilibrium advertising efforts are also increasing in both product differentiation and the speed of price adjustment, while the feedback Nash equilibrium advertising efforts is decreasing in promotional efficiency.