The Advertising Budget's Determinants in a Market with Two Competing Firms

This is an exploratory study of the determinants of the size of the advertising budget in duopolistic competition. The model is a computer simulation that embodies learning, a multipenod decision horizon, brand loyalty, and other basic features of competitive reality in a two firm market.

Theoretical propositions are derived based on the postulated model. These include: Fixed production cost does not affect expenditures. Variable production cost is inversely related to expenditures. An increase in immediate advertising effectiveness increases expenditures. An increase in the lag coefficient increases expenditures. The greater the share-change coefficient, the greater are the expenditures. Initial expenditure levels have a strong effect on later levels. And the initial competition-reaction expectations have a strong effect at first, which later diminishes as firms learn how competitors behave.