Short- and long-term optimality under sustainable threats in Contest Theory models of advertising and short-run competition

• DOI: 10.1007/s10479-024-06462-y
• Publication Date: 2025-01-13T21:17:13Z
• Authors: Reinoud Joosten; Rogier Harmelink; Thom Sparrius
• Keywords: Duopoly; CONTEST; Strategy; Imperfect competition

Abstract We model advertising with effects on different time scales for a duopoly in imperfect substitutes using elements from Contest Theory. Firms additionally compete short-run strategic variable, here price or quantity, allowing simultaneous sequential decisions, collusion endogenously changing stage games. Strategic variables range ‘slow’ (advertising), over ‘moderate’ (quantities) to ‘fast’ (prices). find feasible rewards and equilibria the limiting average reward criterion. Uniqueness of equilibrium is not guaranteed, we introduce two criteria which act as natural refinements. impose stage-game rationality, i.e., firms play optimally each game. Furthermore, establishing threats, require that punishment sustainable, punisher must have nonnegative long term own profits avoid bankruptcy.