Optimal pricing and advertising strategy concern the bilateral spillover effect of advertising investment

Assuming the firm is highly responsive and has cost advantages and is thus capable of entering the market at the same time as the manufacturer by producing a similar version of the manufacturer’s new product. The impact of this mechanism on the two firms is studied through the bilateral spillover effect of advertisement. The main results are as follows. First, contrary to the traditional marketing concept——“good wine needs no bush”, the better quality the products, the more they need to be advertised. Second, our model explains why the quality of most copycats’ products is relatively poor. Finally, low quality products of copycat firms are expected by the manufacturer as well as the copycat firms. The advertising investment of a copycat firm will always increase its profits and reduce the manufacturer’s loss of profit caused by the copycat entering the market, which allows manufacturer and copycat to coexist in the market harmoniously.