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Abstract

Marketing is a functional area within a business firm. It includes all the activities that the firm has at its disposal to sell products or services to other firms (wholesalers, retailers) or directly to the final consumers. A marketing manager needs to decide strategies for pricing (toward consumers and middlemen), consumer promotions (discounts, coupons, in-store displays), retail promotions (trade deals), support of retailer activities (advertising allowances), advertising (television, internet, cinemas, newspapers), personal selling efforts, product strategy (quality, brand name), and distribution channels. Our objective is to demonstrate that differential games have proved to be useful for the study of a variety of problems in marketing, recognizing that most marketing decision problems are dynamic and involve strategic considerations. Marketing activities have impacts not only now but also in the future; they affect the sales and profits of competitors and are carried out in environments that change.

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Notes

  1. 1.

    Aust and Buscher (2014) present a figure showing the number of publications on cooperative advertising per year, from 1970 to 2013.

  2. 2.

    Examples of textbooks that deal with economic applications of repeated games are Tirole (1988), Friedman (1991), Vives (1999), and Vega-Redondo (2003).

  3. 3.

    Examples are short-term price promotions or advertising campaigns.

  4. 4.

    Letting sales appear as \(\sqrt {S}\) instead of linearly turns out to be mathematically expedient, cf. Sorger (1989).

  5. 5.

    An early contribution that combined elements of Lanchester and V-W models is Leitmann and Schmitendorf (1978); see also Jørgensen et al. (2010).

  6. 6.

    This phenomenon, that a profit function is “flat,” has been observed elsewhere. One example is Wilson’s formula in inventory planning.

  7. 7.

    Most often, an OLSE is not time-consistent and the leader’s announcement is incredible. The problem can be fixed if the leader precommits to its announced strategy.

  8. 8.

    See also Eliashberg and Jeuland (1986).

  9. 9.

    It may happen that, say, a manufacturer has a strong bargaining position and can induce the other channel members to make decisions such that the payoff of the manufacturer (not that of the channel) is maximized.

  10. 10.

    An extreme case is vertical integration where channel members merge and become one firm.

  11. 11.

    Myopic behavior means that a decision-maker disregards the dynamics when solving her dynamic optimization problem.

  12. 12.

    In practice it may be illegal to discriminate retailers, for example, by offering different advertising allowances or quoting different wholesale prices.

  13. 13.

    In less altruistic environments, a leader may wish to induce the follower to make decisions that are in the best interest of the leader.

  14. 14.

    Note that there may be a problem of free-riding if franchisees can decide independently on service. The reason is that a franchisee who spends little effort on service gets the full benefit of her cost savings but shares the damage to goodwill with the other franchisee.

  15. 15.

    A revenue-sharing contract is one in which a retailer pays a certain percentage of her sales revenue to the supplier who reciprocates by lowering the wholesale price. This enables the retailer to order more from the supplier and be better prepared to meet demand. A classic example here is Blockbuster, operating in the video rental industry, that signed revenue-sharing contracts with movie distributors. These arrangements were very successful (although not among Blockbuster’s competitors).

  16. 16.

    A modification would be to include competitors’ advertising efforts on the right-hand side of (20.5), affecting negatively the goodwill stock of firm i. See Nair and Narasimhan (2006).

  17. 17.

    A model with a linear advertising cost, say, ca i and where a i on the right-hand side of the dynamics is replace by, say \(\sqrt {a_{i},}\) will provide the same results, qualitatively speaking, as the present model. To demonstrate this is left as an exercise for the reader.

  18. 18.

    We shall disregard “numerical examples” where solutions are characterized using more or less randomly chosen data (typically, the values of model parameters).

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Authors and Affiliations

  1. Department of Business and Economics, University of Southern Denmark, Odense, Denmark

    Steffen Jørgensen

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  1. Steffen Jørgensen
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Correspondence to Steffen Jørgensen .

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Editors and Affiliations

  1. Coordinated Science Laboratory and Department of Electrical and Computer Engineering, University of Illinois at Urbana-Champaign, Urbana, Illinois, USA

    Tamer Başar

  2. Department of Decision Sciences GERAD, HEC Montréal, Montreal, Québec, Canada

    Georges Zaccour

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Jørgensen, S. (2018). Marketing. In: Başar, T., Zaccour, G. (eds) Handbook of Dynamic Game Theory. Springer, Cham. https://doi.org/10.1007/978-3-319-44374-4_22

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