Comparative Advertising General Information

By Leonard Greenhalgh & Max H. Bazerman

 

 

 

Public Domain Exercise distributed by the Dispute Resolution Research Center (DRRC) DRRC, Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, Illinois 60208-2001

Tel: 847-491-8068, Fax: 847-467-5700, drrc@kellogg.northwestern.edu, www.kellogg.northwestern.edu/drrc

 

Your group is a product management group in a consumer products firm, handling the marketing of a new liquid dishwasher detergent. As a group, you are faced with a recurring decision as to whether or not to put on an advertising campaign during the next sales period, which provides consumers with comparative information about your competitor’s product. There are only two significant competitors in the market for liquid dishwasher detergent. Both of the firms also produce products in the solid dishwasher detergent category. Comparative advertising might describe the destructive impact that the liquid detergent has on a dishwasher’s motor, spots left on the dishes, and/or the higher cost of the liquid detergent in comparison to solid detergents. The objective of your group is to maximize your profit over the next ten sales periods. This is also the objective of the product management group of your competitor. Profitability will also be used as a way of measuring your success in this exercise. The profitability of your product depends not only on the decision your group makes, but also on the decision the other group makes. Specifically, if neither group puts on a derogatory advertising campaign, each group will make $1 million for the sales period. If one group puts on a comparative advertising campaign but the competing group does not, then the group that advertises will have a profit of $2 million for the sales period and the competitor

will lose $2 million. If both groups advertise the deficiencies of their competitor’s product, then total sales of liquid dishwasher detergent will fall and both groups will lose $1 million for the sales period. Please refer to Chart 1 for a contingencies summary. Note: There is no carryover effect to the subsequent sales period: advertising affects only the immediate sale period. Industry forecasts provide you with further information, which you will want to take into consideration when formulating a strategy. During the third sales period, sales are expected to go up because of moving season; many consumers change buying patterns and obtain their first dishwasher when they move. The effect of this will be that profits are doubled for that sales period; losses are also doubled due to the greater level of advertising and promotion during this period which is lost if sales do not materialize due to the competitor’s comparative advertising campaign. Period 8 is even more important due to the many high school and college graduations, with many individuals making new consumer decisions for the first time. Profits (and losses) are quadrupled during this period. The tenth sales period is also a boom or bust period, due to the many dishwashers purchased as Christmas presents. Profits (and losses) are again quadrupled during this period. These events are noted in the attached Profit Record Chart.

Chart 1

Company A Not Advertise Advertise

Not Advertise A: $1 million profit B: $1 million profit A: $2 million profit B: ($2 million loss)

Company B Advertise A: (2 million loss) B: $2 million profit

A: ($1 million loss) B: ($1 million loss)

 

 

 

 

2 Comparative Advertising/General Information

 

At the end of the tenth period, both liquid detergents will be taken off the market, to be replaced by a new generation of liquid dishwasher detergents. Thus, the future time horizon beyond the ten sales periods is of no consequence to you in the decisions that you will be making for the 10 sales periods. Normally, you have no contact with your competitor’s product group. However, at the beginning of periods four and nine, a representative (just one person) of each group will be meeting at an industry convention, and will have the option of

privately discussing advertising strategy. These meetings have no legal consequences from the perspective of restraint of trade. In practical terms, each group will have fifteen minutes to develop a strategy before the first period, and three minutes before each succeeding period. Each team’s representative will have three minutes to negotiate before the fourth period and five minutes before the ninth period.

 

 

 

 

3 Comparative Advertising/General Information

 

Profit Record Chart

Period

Choice of A

Choice of B

A Profit (Loss)

B Profit (Loss)

(15 Minute Planning Period)

1

(3 Minute Planning Period)

2

(3 Minute Planning Period)

3 (double)

(3 Minute Negotiating Period) (3 Minute Planning Period)

4

(3 Minute Planning Period)

5

(3 Minute Planning Period)

6

(3 Minute Planning Period)

7

(3 Minute Planning Period)

8 (quadruple)

(3 Minute Planning Period) (5 Minute Negotiation Period)

9

(3 Minute Planning Period)

10 (quadruple)

Total Profit