Agent‐based model for economic impact of free software

This article describes the potential impact that free (i.e., open source) software can have on an existing commercial software market. A model for the software market is constructed in terms of autonomous agents, which represent the users, the companies, and the free software providers. The model specifies a reservation price for each user agent and develops a gradient learning strategy for revenue‐maximizing company agents. Simulations explore parameters such as the demand distribution, and the relative importance of market share, advertising and random effects in product visibility. Results from the case without free software show a prevalence of monopolies, which is consistent with other studies of high‐technology market economics. The effects of free software are not uniform, but are highly parameter dependent. A “capture region” is found in which free software eventually dominates the market. © 2003 Wiley Periodicals, Inc.     

Optimal production and distribution policies for a two-stage supply chain with imperfect items and price- and advertisement-sensitive demand: A note

This paper develops inventory models of a vendor–buyer supply chain with imperfect products and shortages based on Rad et al. (2014) and assumes that both the selling price and advertisements influence market demand. For this reason, the buyer mandates an advertising company for promoting the product. The objective of the paper is to determine pricing, advertising, lot-sizing, backordering, and shipment policies under independent and joint optimization. Numerical examples and a sensitivity analysis illustrate the proposed models. The results indicate that coordination becomes more and more advantageous for the supply chain as the sensitivity of demand to price or advertisements increases. Furthermore, as the uncertainty in item quality increases, the buyer reduces its demand to better match demand and supply.     

Licensing radical product innovations to speed up the diffusion

We present a differential game to study how companies can simultaneously license their innovations to other firms when launching a new product. The licensee may cannibalize licensor’s sales, albeit this can be compensated by gains from royalties. Nonetheless, patent royalties are generally so low that licensing is not an attractive strategy. In this paper we consider the role of licensing to speed up the product diffusion. Word of mouth by licensee’s customers and licensee’s advertising indirectly push forward sales of the licensing company, accelerating new product diffusion. We find evidence that licensing can be a potentially profitable strategy. However, we also find that a weak Intellectual Property Right (IPR) protection can easily diminish the financial attractiveness of licensing.     

The direct marketing of insurance

An insurance company, like many in the financial services industry, will advertise a product in the press and some readers will avail themselves of it. Often the cost of an advertisement will exceed the income derived from the accepted respondents in the following years. It only becomes profitable if acquiring names into a database results in purchases in future years of the advertised and other, cross-sold products. Therefore evaluating advertising effectiveness requires the development of future lifetime values (LTVs), which vary over time between individuals for the different products. Real examples include evaluating the media vehicle, size, content and frequency of advertisements.     

Evaluating the profitability of advertising for heavily advertised brands: an empirical study

Even companies with large advertising budgets are sceptical of OR models in advertising—such models often appear overly complex, unrealistic and costly to use. Here a simple econometric model is proposed which utilises existing company data. The parameters are estimated for the five leading brands in a sector of the German alcoholic drinks market. Estimates of the short and long run advertising elasticities are made and optimum advertising appropriations are calculated.     

Using mixture‐amount modeling to optimize the advertising media mix and quantify cross‐media synergy for specific target groups

One of the critical decisions in media planning is how to allocate advertising efforts across different media. While studies indicate that marketers can create positive synergy effects by spreading their effort across several media, there is little understanding of how much should be invested in each specific medium to optimize advertising results. In this study, we apply a novel methodology, mixture‐amount modeling, which allows advertisers to determine the optimal allocation of advertising effort across media as a function of the total advertising effort. Moreover, we test how the optimal allocation and the resulting response change for consumers with distinctive media usage patterns and varying degrees of product category experience. Based on these results, we quantify the potential synergy between media and calculate the synergistic capacity for specific target groups. We apply the model to data from 52 beauty care advertising campaigns that ran on TV and in magazines in the Netherlands and Belgium. We determine the optimal allocation of advertising investments (measured through Gross Rating Points) to maximize campaign recognition. Our findings support the existence of positive synergistic effects between magazine and TV advertising and illustrate that these effects depend on consumers' media usage and product category experience.     

Optimal proportional reinsurance and dividend payments with transaction costs and internal competition

We study the dividend optimization problem for an insurance company under the consideration of internal competition between different units inside company and transaction costs when dividends occur. The management of the company controls the reinsurance rate, the timing and the amount of dividends paid out to maximize the expected total dividends paid out to the shareholders until ruin time. By solving the corresponding quasi-variational inequality, we obtain the optimal return function and the optimal strategy.     

An application of a network-based futures method to strategic business planning

An analysis of the possible future development paths for the business environment of a medium-sized company operating in the advertising and media sector has been carried out using extended field anomaly relaxation (EFAR). It indicates that a number of development paths exist for the company, the main issues confronting it being location and share structure. The constraints imposed by the environment on the choice of these two conditioning factors are severe and less freedom of action is evident than was perceived to be present before the analysis. For example, the option of relocating to Central London can be seen clearly to be consistent with only a major share sale amounting to exiting the business. The option of a majority or minority share deal together with a relocation to a single site and retaining a London front office emerged as an attractive option for the company. Certain structural characteristics surrounding the share structure are observed. Development of the situation continued after the analysis was reported, leading to confirmation of the validity of the method.     

Testing covariates in high-dimensional regression

In a high-dimensional linear regression model, we propose a new procedure for testing statistical significance of a subset of regression coefficients. Specifically, we employ the partial covariances between the response variable and the tested covariates to obtain a test statistic. The resulting test is applicable even if the predictor dimension is much larger than the sample size. Under the null hypothesis, together with boundedness and moment conditions on the predictors, we show that the proposed test statistic is asymptotically standard normal, which is further supported by Monte Carlo experiments. A similar test can be extended to generalized linear models. The practical usefulness of the test is illustrated via an empirical example on paid search advertising.     

The uncapacitated facility location problem with demand-dependent setup and service costs and customer-choice allocation

We consider a generalization of the uncapacitated facility location problem, where the setup cost for a facility and the price charged for service may depend on the number of customers patronizing the facility. Customers are represented by the nodes of the transportation network, and facilities can be located only at nodes; a customer selects a facility to patronize so as to minimize his (her) expenses (price for service + the part of transportation costs paid by the customer). We assume that transportation costs are paid partially by the service company and partially by customers. The objective is to choose locations for facilities and balanced prices so as to either minimize the expenses of the service company (the sum of the total setup cost and the total part of transportation costs paid by the company), or to maximize the total profit. A polynomial-time dynamic programming algorithm for the problem on a tree network is developed.     

Requisite Decision Modelling: A Case Study

This case study in decision analysis concerns a company that had to decide between continuing to manufacture an old product that might in the near future by banned by the government or introducing an improved but conventional product that would beat the ban but might lose market share to competing products using microchip technology. A decision tree with three attributes describing the consequences over a ten-year horizon modelled the problem. Implementation on a micro computer facilitated extensive sensitivity analyses, the final round of which were conducted by the Board of Directors. More and more pessimistic assumptions were made until the decision switched from the new to the old product; at that point no Director believed all the assumptions. Thus, agreement was reached about the decision even though the Directors disagreed about the uncertainties. The case illustrates ‘requisite’ rather than optimal decision modelling and shows the essential roles of problem structure and sensitivity analysis.     

New product advertising in dynamic oligopolies

The success of the introduction of a new product in a market is very sensitive to the marketing decision variables adopted by the firm. In the present paper we are concerned with the question of new product advertising in a heterogeneous oligopoly market consisting of N firms. A dynamic game is formulated to model strategic as well as sales interactions in such a market. Optimal advertising strategies are identified as open-loop Nash solutions.The comments of two anonymous referees are appreciated. The first author wishes to acknowledge support from NSERC (Grant No. OGP0037342).     

Optimal Multi-Period Advertising Budget Allocation within a Competitive Environment

A mathematical model approach is developed for the purpose of aiding advertising and marketing executives in advertising budget allocation decision-making in the face of a competitive environment. Two alternative model formulations are examined to study the dynamic market response to advertising expenditures. These embody numerous realistic characteristics of the advertising phenomenon including carry-over of past expenditures, diminishing returns and saturation effects, response decay in the absence of advertising and product diffusion effects. Through mathematical programming, the model determines the optimal advertising expenditures over a predetermined planning horizon under alternative constraint options (including competitive advertising assumptions). Illustrations of model applications are also presented.     

Nash game model for optimizing market strategies,configuration of platform products in a Vendor Managed Inventory (VMI) supply chain for a product family

This paper discusses how a manufacturer and its retailers interact with each other to optimize their product marketing strategies, platform product configuration and inventory policies in a VMI (Vendor Managed Inventory) supply chain. The manufacturer procures raw materials from multiple suppliers to produce a family of products sold to multiple retailers. Multiple types of products are substitutable each other to end customers. The manufacturer makes its decision on raw materials’ procurement, platform product configuration, product replenishment policies to retailers with VMI, price discount rate, and advertising investment to maximize its profit. Retailers in turn consider the optimal local advertising investments and retail prices to maximize their profits. This problem is modeled as a dual simultaneous non-cooperative game (as a dual Nash game) model with two sub-games. One is between the retailers serving in competing retail markets and the other is between the manufacturer and the retailers. This paper combines analytical, iterative and GA (genetic algorithm) methods to develop a game solution algorithm to find the Nash equilibrium. A numerical example is conducted to test the proposed model and algorithm, and gain managerial implications.     

A communication mix for an event planning: a linear quadratic approach

The communication mix is a relevant decision issue for an organization that plans the advertising campaign for a fixed future event. It is assumed that the objectives of the organization are to minimize the cost of the advertising campaign and to drive the final demand as close as possible to a target value. Two different advertising channels are available: the first affects deterministically the consumers’ demand, whereas the second presents some stochastic aspects which are out of decision-maker’s control. Some recent mathematical developments on the stochastic linear quadratic control problem allow to formulate and solve some interesting instances of the problem. A comparative analysis of the efficiency of deterministic and stochastic controls is done and the optimal feedback policies are discussed. The trade-off between efficiency and risk of an advertising channel is essential to understand the features of the optimal solutions.This study was supported by MIUR and University of Padua.     

Evaluating capacity management tactics for a legacy manufacturing plant

Robust capacity improvement tactics, namely acquisition of assets and enhanced flexibility in product manufacturing, that alleviate mismatches between required and available capacity are revealed by data analytics. Improvement brought about by these tactics as measured by two performance metrics, production makespan and product availability, is assessed using optimization methodology. This paper demonstrates the value of analysing demand and product specification data to inform capacity re-calibration in an S&P 500 company in the chemical industry. The tactic recommended for implementation, which yielded up to a doubling of the capacity, emerged from an empirical analysis of data for five prototypical planning periods.     

On the impact of advertising initiatives in supply chains

Advertising plays an important role in affecting consumer demand. Socially responsible firms are expected to use advertising judiciously, limiting advertising of “bad” products. An example is the advertising initiative adopted by several major food manufacturers to limit the advertising of unhealthy food categories to children. Such initiatives are based on the belief that less advertising will lead to less consumption of these unhealthy food categories. However, food manufacturers usually distribute products to consumers through retailers whose advertising is not restricted by those initiative programs. In this paper, we examine the effectiveness of such advertising initiative in a leader–follower supply chain with one manufacturer and one retailer. We assume that both the manufacturer and the retailer can choose to participate in the advertising initiative by reducing their advertising levels. The problem is formulated as a Stackelberg game. We show that the effectiveness of the advertising initiative critically depends on the leader’s participation in the initiative. If the leader is willing to reduce the advertising level below a threshold, the market coverage of the product can drop significantly. On the other hand, if only the follower participates in the initiative, the market coverage is likely to expand in the majority of cases. Managerial implications of this research are also discussed.     

National and store brand advertising strategies

As the propensity of premium store brands (SBs) increases, retailers must consider different ways to drive sales besides promotional strategies. With this in mind, we consider a national brand (NB) and a (premium) SB co-existing in a market. Each brand has to decide the amount to invest in advertising its product and the prices to charge its customers, which can be determined separately or in unison. When either advertising expenditures or pricing decisions are set, each brand must keep in mind that the advertising efforts and revenue may spillover between the two brands, customers who intend to purchase the NB may end up purchasing the SB and vice versa. We derive an analytical model of the situations described and characterize equilibrium advertising decisions. We find that the characteristics of a premium SB may depend on which marketing/promoting instrument (advertising or pricing) is the primary method for driving demand; and in some situations an NB may be better off to not advertise at all and instead let the premium SB carry out all of the advertising.     

On the generalizability of advertising pulsation monopoly results to an oligopoly

This paper introduces, for the first time, an analytical framework for modeling and analyzing sales response to advertising pulsation for competitive markets of mature products in continuous time for discrete, piecewise policies that allow unequal cycle lengths. Employing a Nash equilibrium solution concept, this study supported with numerical analysis demonstrates that there is an oligopolistic, as opposed to a monopolistic, justification for advertising at a constant rate in the presence of concave response functions or advertising according to a pulsing policy in the presence of S-shaped response functions. The article employs a modeling framework whereby each of a set of competitors' responses to advertising spending is governed mainly by Lanchester type response is used to analyze the game resulting from cyclical advertising policies that are strictly adhered to by all players. A non-discounted averaged performance is used to assess the purported optimality of different variants of piecewise-constant policies.