Interaction of Pricing, Advertising and Experience Quality: A Dynamic Analysis

Caulkins, J.P., Feichtinger, G., Grass, D., Hartl, R.F., Kort, P.M., & Seidl, A. (2017). Interaction of Pricing, Advertising and Experience Quality: A Dynamic Analysis. European Journal of Operational Research 256 (3) 877-885. 10.1016/j.ejor.2016.06.056.

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For certain goods or services, the quality of the product can be assessed by customers only after consumption. We determine the optimal time paths for pricing, advertising and quality for a profit-maximizing firm facing demand that is influenced both by this experience quality as well as by advertising. In particular, there may exist two optimal trajectories separated by an indifference threshold in which the firm has the same utility of converging to either of the two long-run steady states. Or, to put it in a nutshell: the optimal mix of marketing instruments may lead to history-dependence. One implication is that there may be a market failure such that a government subsidy could help reach the steady state that is best for the Economy in the sense of having greater sales and a higher quality product.

Item Type: Article
Uncontrolled Keywords: System dynamics; Marketing; Optimal control; History-dependence; Skiba point
Research Programs: Advanced Systems Analysis (ASA)
Depositing User: Luke Kirwan
Date Deposited: 05 Jul 2016 07:04
Last Modified: 27 Aug 2021 17:27

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