A dynamic advertising model with reference price effect

Abstract

This paper develops an advertising model in which goodwill affected by advertising effort has a positive effect on reference price and market demand. In a finite planning horizon, the optimal advertising strategy is provided by solving the optimization problem on the basis of Pontryagin's maximum principle, then the optimal sales price is obtained through one time pricing strategy. Furthermore, we extend this problem to an infinite planning horizon and present the corresponding optimal strategies. In addition, the relationships between system parameters and optimal solutions are analyzed. Numerical examples are employed to illustrate the effectiveness of the theoretical results, and to assess the sensitivity analysis of system parameters on the optimal strategies.

Myopic versus Far-Sighted Behaviors in Dynamic Supply Chain Coordination through Advertising with Reference Price Effect

“…Therefore, in our model, specification ss = + ss / will hold for the reason that not only the retail price has the effect on the reference price in the minds of consumers, but also the goodwill of the product can affect the reference price in the long run. Our setting coincides with the previous studies such as Lu et al [26], Zhang et al [27].…”

Dynamic pricing decisions by potential tourists under uncertainty: The effects of tourism advertising

“…Forming a reference point is a complex psychological process that depends on specific decision-making situations. Some studies have found that people tend to quickly adjust their reference points based on decision-making situations (Lu et al, 2016;Park, 2013;Zhang et al, 2015). In the same decision-making situations, different people, or even the same people, may form distinctive reference points.…”

“…The reference price can influence the consumer's purchasing decision, as can the selling price of the product and the product's advertising. The selling price dynamically interacts with the advertising through the reference price in the entire purchasing process (Lu et al, 2016;Zhang et al, 2015).…”

Implications for Firms with Limited Information to Take Advantage of Reference Price Effect in Competitive Settings

“…Hu et al [22] considered a gain-seeking reference price effect model and identified conditions on parameters such that a highlow pricing strategy is optimal. Besides these studies, some valuable insights are also reached by integrating pricing with other decision variables, such as advertising strategy [8,23], replenishment policies [24,25], and preservation technology investment [26]. Our study is significantly different from aforementioned papers in that we consider firms that only master partial information.…”