Advertising Versus Sales In Demand Creation

Using an analytical model, we investigate the dynamics of a firm with market power whose advertisements and sales contribute to its customers’ stock of goodwill. An advertising campaign precedes the firm’s sales when customers are not familiar with its product, (e.g., movies), whereas sales of a new brand of a familiar product may start without advertising (e.g. Crocs shoes). For constant demand elasticity, both advertising and sales take place from the start. Two different types of solutions then emerge: one for low demand elasticity and one for high demand elasticity. These solutions are analyzed by phase diagrams. We also perform a numerical sensitivity analysis.