With the material contained in this chapter, we are entering the realm of non-price competition. To be more precise, I should rather say that we are about to extend the models reviewed in Chapter 3 to variables complementing price, quantity and capacity competition. Yet, it is true that the models appearing in the previous chapter boil down to the determination of outputs and prices.

The relevance of non-price instruments is well understood in industrial economics. In particular, the predatory nature of advertising has been recognised at least since Braithwaite (1928), and its impact on market power since Kaldor (1950).

Quite intuitively in view of its intrinsically dynamic nature, advertising is probably the most debated topic in the tradition of optimal control and differential game theory. In fact, understanding advertising campaigns has been the driver of some of the earliest applications of differential game theory to IO and management, in Friedman (1958), Dhrymes (1962), Clemhout et al. (1971) and Leitmann and Schmitendorf (1978). Interestingly, the views on the nature of advertising commonly accepted in IO (see, e.g., Tirole, 1988; Bagwell, 2007) significantly differ from the taxonomy of advertising acquired in the literature dealing with dynamic formulations of the same problems.

Industrial economists stress that advertising is aimed at enhancing a brand's reputation by altering consumer tastes, thereby preventing any welfare assessment. We are aware of this since Dorfman and Steiner (1954) and many others (Dixit and Norman, 1978). Advertising campaigns can be informative, persuasive or complementary (Stigler and Becker, 1977; Becker and Murphy, 1993), the latter property indicating that advertising contributes to define the overall features of a product, and therefore complements it. In a sense, complementary advertising can be seen as an extension or reinforcement of the concept of persuasive advertising. In the applications of dynamic techniques to this subject, the attention is focussed on the specific state variable affected by advertising efforts (which are controls), or on the impact of advertising along the product life cycle, in such a way that the taxonomy of advertising commonly used in the applications of differential game theory is somewhat different in terms of both terminology and interpretation.