Advertising Strategy and the Coefficient of Cooperation

The purpose of this paper is to show how the degree of firm cooperation affects advertising strategy. A duopoly model is developed that has two distinctive features. First, firms decide whether to compete in constructive or combative advertising as well as the amount of advertising expenditures. Second, the Cyert and DeGroot "coefficient of cooperation" is used to index the degree of firm cooperation. This coefficient allows for the full spectrum of possibilities from cooperation (cartel) to competition. The model produces novel results. When firms are symmetric, sufficient cooperation (competition) causes firms to compete in constructive (combative) advertising, with greater cooperation inducing more ad spending. When firms are asymmetric, firms may compete in different types of advertising: the more competitive firm chooses combative advertising, and the more cooperative firm chooses constructive advertising.