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A note on budget allocation for market research and advertising

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  • Pun, Hubert
  • Heese, H. Sebastian

Abstract

Firms that introduce new products often conduct market research to reduce the substantial uncertainty in demand. When a fixed budget is assigned to marketing-oriented activity, investments in market research must be balanced against other advertising expenses. We characterize a firm׳s optimal marketing and production decisions for a new product. The larger a firm׳s production cost, the higher is the cost associated with unsold products. Market research increases the forecast accuracy and thus reduces the risk of overage. As a consequence, one might expect that a firm׳s investment in market research should be higher if it faces higher production costs. Interestingly we find that an increase in the production cost may sometimes lead to a decrease in the optimal investment in market research, even when the marketing budget is not restrictive.

Suggested Citation

  • Pun, Hubert & Heese, H. Sebastian, 2015. "A note on budget allocation for market research and advertising," International Journal of Production Economics, Elsevier, vol. 166(C), pages 85-89.
    • Handle: RePEc:eee:proeco:v:166:y:2015:i:c:p:85-89
    DOI: 10.1016/j.ijpe.2015.04.013
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    Cited by:

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