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Optimum Advertising and Goodwill under Uncertainty

Charles S. Tapiero
Operations Research
Vol. 26, No. 3 (May - Jun., 1978), pp. 450-463
Published by: INFORMS
Stable URL: http://www.jstor.org/stable/169756
Page Count: 14
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Optimum Advertising and Goodwill under Uncertainty
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Abstract

This paper extends past studies of advertising based on goodwill to include the probabilistic effects of advertising and forgetting. A stochastic advertising model for a monopoly firm is constructed and resolved for specific forms of feedback advertising policy. Further, a diffusion-approximation model is also suggested. Using these models, we derive optimum advertising policies of the open-loop and feedback type. The essential implications of the paper are: (i) advertising is a "risky investment" in goodwill, substituting current certain expenditures for uncertain profits; (ii) risk-averse firms will advertise less and risk-taking firms more; (iii) large risk-aversion and forgetting rates both lead to the standard competitive result in advertising.

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