【摘要】：We use a differential games framework to study two modes of dynamic advertising competition, namely flexible (or feedback-loop) and committed (or open-loop), between two e-retailers that compete for traffic. In feedback-loop competition, the advertising contract allows firms to adjust their advertising level during the advertising campaign. On the other hand, in open-loop competition, the contract requires the firms to commit upfront to an advertising plan (however, not necessarily one that advertises at a fixed rate). We ask the question: Which contract (flexible or committed), is better for the firms (advertising agent)? We find that the firms tend to advertise less and earn more under flexible contracts. As a result, the advertising agent earns less under a flexible contract. For e-retailers, the trade-off between flexible and committed contracts becomes complex if operational considerations are included. These considerations arise from Information Technology (IT) costs incurred for processing the incoming traffic that arrives at the e-retailers' websites. The advantage of flexible contracts (to firms) is reduced by the inclusion of operational considerations. From the perspective of the advertising agent, the agent can offer a discount for a flexible advertising contract and exploit the force of competition to offset the lower revenue earned under flexible contracts. The optimal discount offered under a flexible contract reduces as the IT cost increases.
