Welfare Analysis of Dynamic Voluntary Advertising in Covered Markets

In this study, we analyze a dynamic duopoly game in which firms can use advertising and price as competitive tools. The market is assumed to be completely covered in the sense that all consumers purchase a product from one of the two firms. We assume that advertising creates a positive externality. Thus, each firm voluntarily advertises to persuade consumers to buy its products over those of the other firm, even though the firms compete with one another in price. Two cases are considered: an interior case and a corner case. In this situation, we investigate how changes in consumer preference and firm technology level affect advertising, profits, and economic welfare and highlight the differences between the two cases.