Advertising Strategies in Electronic Retailing: A Differential Games Approach

  • Authors:

  • Dengpan Liu;Subodha Kumar;Vijay S. Mookerjee

  • Affiliations:

  • College of Business Administration, University of Alabama in Huntsville, Huntsville, Alabama 35899;Mays Business School, Texas A&M University, College Station, Texas 77843;School of Management, University of Texas at Dallas, Richardson, Texas 75080

  • Venue:
  • Information Systems Research
  • Year:
  • 2012

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Abstract

We consider advertising problems under an information technology (IT) capacity constraint encountered by electronic retailers in a duopolistic setting. There is a considerable amount of literature on advertising games between firms, yet introducing an IT capacity constraint fundamentally changes this problem. In the presence of information processing constraints, although 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 leave the website of a firm because of slow response. In such situations, attracting more traffic to a firm's site (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.