Optimal Product Quality And Advertising

Abstract

The purpose of this paper is to study an advertising-quality control problem and derive some essential properties relating to advertising, quality, and the process of product differentiation. In this paper advertising is assumed to affect new buyers’ arrival, while quality, experienced after consumption, is used to maintain buyers and repeat buy. To render the problem tractable, a simple deterministic advertising optimization model of the Nerlove-Arrow type is used where quality affects firm’s production costs and the buyers’ loss rate.

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