Strategic pricing and advertising decisions under competition with long-term advertising effects

Abstract

This study examines how negative long-term advertising effects influence startups’ strategic choices between myopic and far-sighted approaches in competitive markets. Using a two-period game model, it analyzes how firms balance the short-term benefits of advertising with its potential long-term drawbacks when making pricing and promotional decisions. The analysis shows that when advertising has positive long-term effects, far-sighted strategies are theoretically optimal regardless of the timing of advertising decisions. In practice, however, startups may struggle to sustain such approaches, as early-stage losses can create financial pressure that pushes them toward short-term survival strategies. When long-term advertising effects are negative, the optimal strategy becomes more sensitive to market conditions. The model shows that in markets with low product substitutability, far-sighted strategies continue to deliver better outcomes. As products become more similar, myopic strategies become more attractive—especially when the negative long-term effects are relatively mild. Furthermore, when the short-term impact of advertising is particularly strong, a myopic strategy can outperform a far-sighted one, even if long-term consequences are unfavorable. Under certain conditions, both firms choosing far-sighted strategies may also lead to a Prisoner’s Dilemma, where mutual restraint results in lower overall profits. These findings highlight the complex trade-offs startups face between short-term gains and long-term viability. Startups must weigh immediate advertising returns against potential long-term costs and develop pricing and advertising strategies that reflect both market dynamics and sustainable growth objectives.