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An Analysis of Optimal Advertising Under Uncertainty

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  • Dung Nguyen

    (Graduate School of Business, University of Pittsburgh, Pittsburgh, Pennsylvania 15260)

Abstract

We examine the firm's optimal advertising behavior under conditions of uncertainty. For the static one-period model, we show that the firm's attitude toward risk may be responsible for the potential divergence between advertising decisions under uncertainty and those under deterministic conditions. For the dynamic multi-period model, the ultimate impact of uncertainty on advertising is further complicated when the sales response function contains an unknown parameter, and the firm wishes to gain more information about it through experimentation. We demonstrate that whether it is optimal for the firm to experiment at an advertising rate higher, equal to, or lower than the myopic (one-period) level would depend on the specification of the response function. Finally, we offer some empirical evidence for our assumption of a quadratic sales response function, using time-series data of twelve major brands of cigarettes.

Suggested Citation

  • Dung Nguyen, 1985. "An Analysis of Optimal Advertising Under Uncertainty," Management Science, INFORMS, vol. 31(5), pages 622-633, May.
    • Handle: RePEc:inm:ormnsc:v:31:y:1985:i:5:p:622-633
    DOI: 10.1287/mnsc.31.5.622
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    Citations

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    Cited by:

    1. Danaher, Peter J. & Rust, Roland T., 1996. "Determining the optimal return on investment for an advertising campaign," European Journal of Operational Research, Elsevier, vol. 95(3), pages 511-521, December.
    2. James P. Gander, 2018. "Advertising Economics Under Uncertainty: An Alternative Approach," Working Paper Series, Department of Economics, University of Utah 2018_01, University of Utah, Department of Economics.
    3. Boutselis, Petros & McNaught, Ken, 2014. "Finite-Time Horizon Logistics Decision Making Problems: Consideration of a Wider Set of Factors," Chapters from the Proceedings of the Hamburg International Conference of Logistics (HICL), in: Blecker, Thorsten & Kersten, Wolfgang & Ringle, Christian M. (ed.), Innovative Methods in Logistics and Supply Chain Management: Current Issues and Emerging Practices. Proceedings of the Hamburg International Conferenc, volume 19, pages 249-274, Hamburg University of Technology (TUHH), Institute of Business Logistics and General Management.

    More about this item

    Keywords

    advertising; decisions under uncertainty;

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