Optimal Competitive Strategies: Pricing and Advertising in Dynamic Market Segments

This letter investigates a duopolistic market where firms compete through both pricing and advertising strategies. Due to customer attrition and the effects of advertising, each firm’s loyal customer segment evolves dynamically. This leads to a dynamic market segment competition in which firms aim to maximize profits through optimal strategies. Our analysis of the one-stage game reveals at most two Nash equilibria. Notably, even with symmetric initial positions, firms adopt asymmetric strategies in equilibrium: one employs greater advertising intensity and higher pricing to secure more profits. In the two-stage game, our analysis shows that firms optimally increase first-stage advertising to sustain larger loyal segments, thereby boosting subsequent profits. These findings have important implications for multi-stage competition.