Abstract: In this paper, by using game theory, the twodimensional relationship between advertisement and product price in duopoly competition is discussed. A mathematical model is developed and solved to optimize advertising cost and price at the steady state. With the model and examples, sensitivity analysis is conducted. Results show that, for competing manufacturers with the same advertising cost, the greater the market base a manufacturer has, the higher product price and advertising investment, and greater market demands are. The manufacturers who have small market base are in a disadvantage position in both demands and profits. Thus, strengthening the advertising competition is beneficial to manufacturers with a large market base, while enhancing price competition is beneficial to manufacturers with a small market base.

Key words: duopoly, pricing, advertising, game theory