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Technical Note—A Pure Birth Model of Optimal Advertising with Word-of-Mouth

Author

Listed:
  • George E. Monahan

    (Washington University in St. Louis)

Abstract

A stochastic, dynamic model of advertising, which incorporates both advertising and word-of-mouth effects, is formulated. The time between the acquisition of new customers is assumed to be random. The distribution of the time until the firm obtains a new customer depends upon the rate of advertising expenditures and upon a word-of-mouth parameter. The problem of choosing the rate of advertising expenditures so as to maximize long-run expected profit is formulated as a continuous-time Markov decision chain. The impact of changes in various parameters of the model on optimal advertising decisions is studied.

Suggested Citation

  • George E. Monahan, 1984. "Technical Note—A Pure Birth Model of Optimal Advertising with Word-of-Mouth," Marketing Science, INFORMS, vol. 3(2), pages 169-178.
    • Handle: RePEc:inm:ormksc:v:3:y:1984:i:2:p:169-178
    DOI: 10.1287/mksc.3.2.169
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    Cited by:

    1. Mariusz Górajski & Dominika Machowska, 2017. "Optimal double control problem for a PDE model of goodwill dynamics," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 85(3), pages 425-452, June.
    2. Eryn Juan He & Joel Goh, 2022. "Profit or Growth? Dynamic Order Allocation in a Hybrid Workforce," Management Science, INFORMS, vol. 68(8), pages 5891-5906, August.
    3. Kamrad, Bardia & Lele, Shreevardhan S. & Siddique, Akhtar & Thomas, Robert J., 2005. "Innovation diffusion uncertainty, advertising and pricing policies," European Journal of Operational Research, Elsevier, vol. 164(3), pages 829-850, August.
    4. Fruchter, Gila E. & Van den Bulte, Christophe, 2011. "Why the Generalized Bass Model leads to odd optimal advertising policies," International Journal of Research in Marketing, Elsevier, vol. 28(3), pages 218-230.
    5. Dominika Bogusz & Mariusz Gorajski, 2014. "Optimal Goodwill Model with Consumer Recommendations and Market Segmentation," Lodz Economics Working Papers 1/2014, University of Lodz, Faculty of Economics and Sociology, revised Oct 2014.

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