Abstract: The social perception influences product and brand evaluations. Consumers are especially susceptible to reference price effects when they make purchase decisions for a certain product. Meanwhile, the advertising and pricing are the determinable factors that have impact on consumers' reference price which also are fundamental marketing strategies. Therefore, how to dynamically set advertising and pricing to maximize firms' profits are essential tasks.
To explore these problems, a dynamic advertising and pricing model is built in a duopoly market where two firms compete through time using pricing and advertising as their dominated marketing tools. From the aspect of firms' advertising practice and consumers' strategy behavior respectively, two alternative strategies that firms can choose are proposed. They are advertising budget (commit to an advertising budget in reference period) and price commitment (guarantee future price will remain the same in reference period). These two strategies can not only affect the decisions of consumers, but also the competitor. Three different cases' which are both firms choose the price commitment, one firm chooses the advertising budget and the other chooses the price commitment, both firms choose the advertising budget, are first explored. Explicit solutions to optimization problems are also obtained. Second, the impact of these two strategies have on firms' advertising effort, pricing and profits is analyzed. The study finds that i) the steady reference price is always higher than the steady retail price; ii) under the case in which both firms choose the advertising budget, the price changing rate is higher than that of under the case in which one firm chooses the price commitment and the other chooses the advertising budget; iii) the price strategy is also affected by the initial reference price. At last, the simulation analysis is used to illustrate in what condition and which one of the two strategies mentioned above are firms' best choice. The research results can guide firms to make dynamic advertising efforts strategy and pricing strategy in a duopoly market.

Key words: reference price effect, price commitment, dynamic pricing, advertising commitment, advertising efforts