Signaling Quality: Dynamic Price-Advertising Model |
| |
Authors: | G E Fruchter |
| |
Institution: | (1) Jones School of Management, Rice University, Houston, TX 77005, USA;(2) Harvard University, Cambridge, MA, USA |
| |
Abstract: | This paper extends the existing quality-signaling literature by investigating the roles of price and advertising levels as
quality indicators in a dynamic framework. Considering perceived quality as a form of goodwill, we modify the well-known Nerlove-Arrow
dynamic model to include price effects. In our model, price is used both as a monetary constraint and as a signal of quality,
while advertising spending is used only as a signaling device, and thus purely as a dissipative expense. Utilizing optimal
control, we determine optimal decision rules for a firm regarding both price and advertising over time as functions of perceived
quality. The results indicate that, when prices act as monetary constraints and are reduced to increase demand, the firm should
use the signaling role of advertising by increasing spending to accelerate perceived quality increases. In cases when the
value of the perceived quality goes up together with the increase in the perceived quality by more than the demand, in percentage
terms, the firm should increase the price (use its signaling role). At steady-state, we find that the level of optimal profit
margin relative to price decreases with the elasticity of demand with respect to the brand price. However, higher elasticity
of demand with respect to the firm’s perceived quality and/or a higher impact of price (advertising) lead/leads to a higher
optimal profit margin (advertising spending) relative to price (revenue). |
| |
Keywords: | |
本文献已被 SpringerLink 等数据库收录! |
|