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2002

**New product introduction: goodwill, time and
**

advertising cost*

Alessandra Buratto1, Bruno Viscolani2

1 Università di Padova, Dipartimento di Matematica Pura e Applicata, Via Belzoni, n. 7,

I-35131 Padova, Italy (e-mail: buratto@math.unipd.it)

2 Università di Padova, Dipartimento di Matematica Pura e Applicata, Via Belzoni, n. 7,

I-35131 Padova, Italy (e-mail: viscolani@math.unipd.it)

Manuscript received: July 2001/Final version received: October 2001

**Abstract. The advertising activity has an important role in the introduction of
**

a new product. We tackle the problem of determining the advertising plan for

preparing the product introduction, having the objectives of maximizing the

product image at the launch time, minimizing the campaign length and mini-

mizing the total advertising expenditure, within a ﬁxed time interval. After

formulating the new product introduction optimal control problem, we study

and solve two special cases of it, namely the minimum time and the advertis-

ing cost problems. From the former we derive the existence of an optimal so-

lution of the original problem, whereas we obtain its structure from the latter.

Finally we present two alternative formulations of the original problem in the

non-linear programming framework and suggest using them to solve the

bounded time problem.

**Key words: Marketing, goodwill, new product introduction, optimal control,
**

non-linear programming

Mathematics Subject Classiﬁcation 2000: Primary: 49N90; Secondary: 90B60.

1 Introduction

**The ﬁrm must plan carefully the di¤erent marketing actions which it has to
**

take to introduce a new product in the market ([7], p. 307). Such coordinated

actions must be performed before the sales start as well as after it. The ﬁrm

communication has an important role to play, as one can observe for instance

in the car industry, where an awareness advertising campaign usually precedes

the distribution of a new car model.

*** Supported by MURST, CNR and University of Padua.
**

56 A. Buratto, B. Viscolani

**Here we formulate and discuss the problem of determining the advertising
**

policy to prepare the introduction of a new product into a market. We assume

that the ﬁrm has three objectives: to maximize the product image (goodwill) at

the launch time T, to minimize the launch time T, to minimize the total dis-

counted advertising cost. The ﬁrm must determine the launch (or market en-

try) time T, at which the introduction of the product will begin, and plan the

launch advertising campaign on the interval ½0; T (see [7], p. 333). We for-

mulate an optimal control problem in which the goodwill evolves depending

on the ﬁrm advertising policy, as in the so-called ‘‘capital stocks generated by

advertising’’ models (see [5]). On the other hand, we do not take into account

directly the sales, as they only begin after the launch time T, when the launch

advertising policy stops. In fact, we assume that the launch advertising policy

is a ﬁrst part of a more complex advertising process: a second part of it starts

at time T and pursues a di¤erent sales dependent objective. We focus only on

the ﬁrst part of the process, that is restricted to the pre-launch interval up to

time T. We aim at obtaining some qualitative information on the optimal

advertising policies and refer to a goodwill concept which is analogous to the

Nerlove-Arrow’s one (see [9]).

The ﬁrst objective of maximizing the goodwill at the launch time is moti-

vated by the ﬁrm taking into account the ‘‘communication e¤ects of advertis-

ing’’ on the consumer behavior, (see [3], p. 579). On the other hand, the e¤ects

of the advertising policy until the time T on the sales, which will occur later,

depend on the goodwil value at T: the greater the goodwill value at T, the

higher the following sale rate, no matter which advertising policy will be

chosen after T.

The second objective of minimizing the launch time T reﬂects the impor-

tance of reducing the product time to market (see [7], p. 308). Time plays a

crucial role in the product introduction problem, expecially for the ‘‘fast cy-

cle’’ industries products [4] or for those products which are new both to the

market and to the company, namely the ‘‘new product innovation’’ type ([8],

p. 458), or the ‘‘new-to-the-world’’ type (see [7], p. 307), as some competitor

could launch a similar product in advance. Yet, also for those types of prod-

ucts which are new only for the company, delaying the introduction entails the

risk of losing revenues, as customers may prefer to buy a competitor’s product

instead of waiting too much the announced one. Furthermore, the risk of a

long-term loss in market share has to be considered, in particular when either

the switching costs are high, or the quality of the competitors products is good,

or the products di¤erentiation is low [6].

The third objective of minimizing the total discounted advertising expen-

diture is a quite natural e‰ciency requirement.

In Section 2 we state the optimal control problem of the introduction of

a new product, under the assumption that a single function of the three ob-

jective components, i.e. the ﬁnal goodwill, the total discounted advertising

cost and the ﬁnal (launch) time, can represent the ﬁrm global objective. In

Sections 3 and 4 we analyse two special problems: the objective of the ﬁrst

one is that of minimizing the launch time, whereas the objective of the sec-

ond one is that of minimizing the discounted advertising cost for the in-

troduction of the product at a given time. In Section 5 we present two alter-

native formulations of the original problem in the non-linear programming

framework and suggest one of them as the way to solve the bounded time

problem.

New product introduction 57

2 Introduction of a new product: an optimal control problem

**Let kðtÞ be the goodwill level at time t, i.e. the product image by the con-
**

sumers, let wðtÞ be the advertising expenditure intensity and let yðtÞ be the

total discounted advertising expenditure up to time t, at the discount rate

r > 0. After assuming that

**a) the goodwill kðtÞ depends on the expenditure rate through a special linear
**

di¤erential equation,

b) the ﬁrm image level at time 0 contributes to determine the initial product

image, and hence the product may have a positive goodwill level kð0Þ ¼

k 0 b 0,

c) a known level kT of goodwill must be reached in order to introduce prof-

itably a given product in the market,

d) the success of the product introduction depends on the time of the launch T

and on the ﬁnal goodwill kðTÞ,

e) the time of the launch T is constrained to belong to a closed interval T J

½0; þy½, either bounded or unbounded,

**we are led to formulate the problem of determining the advertising policy for
**

the product introduction and the launch time as the following optimal control

problem I ðkT ; TÞ:

maximize SðkðTÞ; T; yðTÞÞ; ð1Þ

subject to k_ ðtÞ ¼ bw a ðtÞ ckðtÞ; ð2Þ

y_ ðtÞ ¼ ert wðtÞ; ð3Þ

kð0Þ ¼ k 0 ; kðTÞ b kT ; ð4Þ

yð0Þ ¼ 0; ð5Þ

wðtÞ A ½0; w; ð6Þ

T A T: ð7Þ

**We assume that the objective function S : ½0; þy½ 3 ! R represents the utility
**

obtained from the introduction of the product and is a continuously di¤er-

entiable function, such that

**qSðk; t; yÞ qSðk; t; yÞ qSðk; t; yÞ
**

b 0; a 0; a 0: ð8Þ

qk qt qy

**These conditions require the utility to be increasing in the goodwill and to be
**

decreasing in the ﬁnal time and in the total communication cost.

As for the admissibility conditions (2)–(7), we assume that

. k is the initial goodwill level, 0 a k < k ;

. ckðtÞ is the goodwill spontaneous decay term, c > 0;

0 0 T

58 A. Buratto, B. Viscolani

**. bw ðtÞ is the advertising production function in terms of goodwill, b > 0,
**

a

**. 0w <is athe< maximum
**

1;

advertising expenditure rate, w > 0.

**We observe that the goodwill evolution is described by a di¤erential equa-
**

tion which is a generalization of the linear motion equation proposed by Ner-

love and Arrow [9]. Here we have a non-linear advertising productivity in

terms of goodwill and the parameter a allows to represent a variety of good-

will production possibilities. In the limit, as a approaches 1, we ﬁnd the

Nerlove-Arrow goodwill motion equation.

The constraint wðtÞ A ½0; w represents a general technological costraint, e.g.

due to the communication channels capacity.

In the following sections we discuss the problem by using an indirect

method, which requires our studying ﬁrst two special cases of the problem, to

obtain some relevant information, and then reformulate the original problem

as a non-linear programming problem. The special problems we study ﬁrst are

those of introducing a new product in minimum time and at minimum dis-

counted cost respectively. The non-linear programming problem we obtain has

two decision variables, namely the goodwill level at the introduction (launch)

time and the launch time. This indirect approach is useful in order to avoid

the complexity of the system of the Pontryagim Maximum Principle con-

ditions and of the naturally resulting representation of the optimal solution.

An idea of the optimal solutions representation complexity is given by the

discussion of the optimal solution for a similar, but much simpler problem in

[1] and [2].

3 Introducing a new product in minimum time

The minimum time problem It ðk Þ is deﬁned, for k > k 0 , as

minimize T; ð9Þ

subject to ð2Þ; ð6Þ;

and to kð0Þ ¼ k 0 ; kðTÞ b k; ð10Þ

T b 0: ð11Þ

**The minimum time problem It ðk Þ is equivalent to the problem I ðk; ½0; þy½Þ
**

with the special objective function Sðk; t; yÞ ¼ t.

Let us call sustainable goodwill the parameter

bw a

ks ¼ ; ð12Þ

c

**which is in fact the least upper bound of the reachable goodwill values, under
**

the assumptions of the problem I ðkT ; ½0; þy½Þ and the additional condition

k 0 < ks .

Then we can prove that

New product introduction 59

**i) the problem It ðk Þ has an optimal solution if and only if k < ks ;
**

ii) the optimal value function of problem It ðk Þ, i.e. the minimum time, is

1 ks k 0

Tmin ðk Þ ¼ ln ; k 0 < k < ks ; ð13Þ

c ks k

**iii) the (unique continuous) optimal control of problem It ðk Þ is wðtÞ 1 w, t A
**

½0; Tmin .

**Hence we obtain a characterization of the feasibility of the original problem
**

I ðkT ; TÞ.

Theorem 1. A feasible solution for the problem I ðkT ; TÞ exists if and only if

ks > kT and sup T b Tmin ðkT Þ:

Proof. Let the conditions hold and let us deﬁne

T1 ¼ maxfmin T; Tmin ðkT Þg

and

8

>

> w; t A ½0; Tmin ðkT Þ;

>

<

^ ðtÞ ¼

w

>

> ckT 1=a

>

: ; t A ½Tmin ðkT Þ; T1 ;

b

**then w^ðtÞ, t A ½0; T1 is a feasible control function which determines a state
**

function ^k ðtÞ such that ^ k ðT1 Þ ¼ kT . Therefore the triplet ð^k ðtÞ; w

^ ðtÞ; T1 Þ is

feasible. On the other hand, if the condition did not hold, then every feasible

control would lead to a non feasible state function, with kðtÞ < kT for all

t. r

**We observe that the minimum time Tmin ðkÞ is a 1-1 function, and its in-
**

verse,

k max ðtÞ ¼ ks ðks k 0 Þect ; ð14Þ

is the maximum reachable value of the goodwill at the time t.

**Corollary 1. A feasible solution for the problem I ðkT ; TÞ exists if and only if
**

either

kT a sup kmax ðTÞ ¼ kmax ðmax TÞ; if T is bounded;

or

**kT < sup kmax ðTÞ ¼ lim kmax ðtÞ; if T is unbounded:
**

t!þy

60 A. Buratto, B. Viscolani

**Symmetrically, if k 0 > 0, solving the minimum time problem for k A 0; k 0
**

gives the decay time to the goodwill k,

1 k0

Td ðk Þ ¼ ln ; 0 < k a k 0; ð15Þ

c k

and its inverse, the minimum reachable value of the goodwill at the time t, is

k min ðtÞ ¼ k 0 ect : ð16Þ

4 Introducing a new product at minimum discounted cost

**Let us denote by Iy ðk; TÞ the problem of minimizing the discounted advertis-
**

ing cost to reach at least the goodwill k at the ﬁxed time T, which we call the

advertising cost problem,

ðT

minimize ert wðtÞ dt; ð17Þ

0

subject to ð2Þ; ð6Þ

and to kð0Þ ¼ k 0 ; kðTÞ b k; ð18Þ

**where T > 0 is ﬁxed. The problem Iy ðk; TÞ just introduced is equivalent to the
**

problem I ðk; TÞ with the special objective function Sðk; t; yÞ ¼ y, in the

sense that a quadruple ðk ðtÞ; y ðtÞ; w ðtÞ; TÞ is an optimal solution of the

latter, where the optimal value of the objective functional (1) is y ðTÞ, if and

only if ðk ðtÞ; w ðtÞÞ is an optimal solution of the former and the optimal

value of the objective functional (17) equals y ðTÞ. We will denote by Y ðk; TÞ

the optimal value function of problem Iy ðk; TÞ and call it the minimum dis-

counted cost function. The minimum discounted cost function Y ðk; tÞ is de-

ﬁned for all ðk; tÞ such that k a k max ðtÞ, because of Corollary 1; moreover,

Y ðk; tÞ ¼ 0 for all k a k min ðtÞ, because the zero control wðtÞ 1 0 is an optimal

solution of the problem Iy ðk; TÞ if and only if k a k min ðTÞ.

Lemma 1. Let T > 0 be ﬁxed; the continuously di¤erentiable control function

wðtÞ ¼ weððcþrÞ=ð1aÞÞðtTÞ ; t A ½0; T; ð19Þ

**determines an admissible solution ðkðtÞ; wðtÞÞ for the problem Iy ðk; TÞ, if and
**

only if k a ^

k ðTÞ, where

^

k ðTÞ ¼ k 0 ecT þ ^

ky ð1 eððcþarÞ=ð1aÞÞT Þ: ð20Þ

and

^ ð1 aÞcks

ky ¼ : ð21Þ

c þ ar

New product introduction 61

**Proof. In fact, the function (19) is an admissible control for problem Iy ðk; TÞ
**

and ^k ðTÞ is the value, at time T, of the goodwill function which is associated

to the control (19) through the motion equation (2) and the initial condition

given in (18). r

**The advertising policy (19) is an increasing exponential function with the
**

parameter ðc þ rÞ=ð1 aÞ and reaches the maximum feasible expenditure rate

w at the ﬁnal time T. We further observe that ^k ð0Þ ¼ k 0 and ^k ðtÞ ! ^ky as

t ! y. Moreover, if 0 < k 0 < ks , then ^k 0 ð0Þ > 0 and ^k ðtÞ has a maximum at

1a ks

t¼ ln .

aðc þ rÞ k 0

Theorem 2. For all T > 0 and k A kmin ðTÞ; kmax ðTÞ, there exists t ¼ tðk; TÞ b

0, such that the optimal control of Iy ðk; TÞ is wt ðtÞ; t A ½0; T, where

wt ðtÞ ¼ w minf1; eððcþrÞ=ð1aÞÞðttÞ g; ð22Þ

the function t ¼ tðk; TÞ is continuous, strictly decreasing in k and

tðk; TÞ ! þy as k ! kmin ðTÞ ð23Þ

tð^

k ðTÞ; TÞ ¼ T; ð24Þ

tðkmax ðTÞ; TÞ ¼ 0; ð25Þ

**furthermore, t ¼ tðk; TÞ is continuously di¤erentiable at all points ðk; TÞ 0
**

ð^

k ðTÞ; TÞ.

**Proof. In the special case that k ¼ k max ðTÞ, we notice that there exists a unique
**

(continuous) feasible solution, which is determined by the control funcion

wðtÞ 1 w. Of course it is the optimal solution and has the form (22) with t ¼ 0,

so that tðk max ðTÞ; TÞ ¼ 0.

Then, let us consider the problem Iy ðk; TÞ with the assumption that

k min ðTÞ < k < k max ðTÞ.

The ‘‘current value’’ Hamiltonian function is H c ðk; w; pÞ ¼ p0 w þ

p½bw a ck and if ðk ðtÞ; w ðtÞÞ is an optimal solution, then it satisﬁes the

Pontryagin’s Maximum Principle necessary conditions

**i) ð p0 ; pðtÞÞ 0 ð0; 0Þ, for all t,
**

ii) w ðtÞ A arg maxfp0 w þ bpðtÞw a j w A ½0; wg, for all t,

iii) p_ ðtÞ ¼ ðc þ rÞ pðtÞ, a.e.,

iv) p0 A f0; 1g,

v) pðTÞ b 0, pðTÞðk ðTÞ k Þ ¼ 0.

From (iii) we obtain that the adjoint function is

pðtÞ ¼ pðTÞeðcþrÞðtTÞ

**and hence, from (iv), (v) and (i), that a feasible solution to the necessary con-
**

ditions only exists with p0 ¼ 1, pðTÞ > 0 and k ðTÞ ¼ k. From the condition

(ii) we have that

62 A. Buratto, B. Viscolani

w ðtÞ ¼ minfw; ðabpðTÞeðcþrÞðtTÞ Þ 1=ð1aÞ g;

and we notice that w ðtÞ ¼ wt ðtÞ provided that

1 abpðTÞ

t¼T ln 1a :

cþr w

**Let kt ðtÞ, t b 0, be the solution of equation (2) using the control wt ðtÞ and the
**

initial condition kt ð0Þ ¼ k 0 , then we obtain that

(

k 0 ect þ ^

ky ect eððaÞ=ð1aÞÞðcþrÞt ðeððcþarÞ=ð1aÞÞt 1Þ; t a t,

kt ðtÞ ¼ ð26Þ

ð^

k ðtÞ ks ÞecðttÞ þ ks ; t > t.

**We observe that ðwt ðtÞ; kt ðtÞÞ, t A ½0; T, is an admissible solution of the adver-
**

tising cost problem which satisﬁes the transversality condition (v) if and only

if kt ðTÞ ¼ k, i.e. if and only if fðk; t; TÞ ¼ kt ðTÞ k ¼ 0.

The function fðk; t; tÞ is continuously di¤erentiable at all ðk; t; tÞ such that

t 0 t. Moreover, for all ðk; tÞ, the function fðk; t; tÞ is strictly decreasing in t

and has range k min ðtÞ k; k max ðtÞ k; therefore, there exists a function

tðk; tÞ, which is the unique solution to the equation fðk; t; tÞ ¼ 0.

From the deﬁnition (20) and the meaning of ^k ðtÞ given in the proof of

Lemma 1, we observe that tð^k ðtÞ; tÞ ¼ t. Moreover, we observe that the implicit

function theorem assumptions hold at all solutions ðk 0 ; t 0 ; t 0 Þ of fðk; t; tÞ ¼ 0

such that t 0 0 t 0 , i.e. such that k 0 0 ^k ðtÞ: hence tðk; tÞ is continuous at all ðk; tÞ

and continuously di¤erentiable for k 0 ^k ðtÞ. Furthermore, tðk; tÞ is strictly

decreasing in k and satisﬁes the conditions (23)–(25).

The unique solution we have obtained satisﬁes the assumptions of the

Mangasarian su‰ciency theorem ([10], Th. 4, p. 105). r

**We call phase the parameter t of the advertising policy wt , deﬁned in (22).
**

Therefore, we will call optimal phase the function tðk; tÞ which is deﬁned im-

plicitly by the equation fðk; t; tÞ ¼ 0.

The function ^ k ðtÞ has the meaning of maximum goodwill value in ½0; t,

when using an increasing exponential control function with ‘‘optimal’’ param-

eter ðc þ rÞ=ð1 aÞ.

**Remark. If k min ðtÞ < k a ^k ðtÞ, then we can solve explicitly the equation
**

fðk; t; tÞ ¼ 0 for the optimal phase function and obtain

1a ^ eððcþarÞ=ð1aÞÞt 1

tðk; tÞ ¼ ln ky : ð27Þ

aðc þ rÞ ke ct k 0

**In this case the optimal control is in fact an increasing exponential function
**

with ‘‘optimal’’ parameter ðc þ rÞ=ð1 aÞ.

Lemma 2. If k 0 ^

k ðtÞ, then

qtðk; tÞ

< 0; for all t; ð28Þ

qk

New product introduction 63

and

qtðk; tÞ

> 0; for all k > ^k ðtÞ; ð29Þ

qt

moreover, for all k < ks ,

**lim tðk; tÞ ¼ þy: ð30Þ
**

t!þy

Proof. From (26) we obtain that

qfðk; t; tÞ

< 0; for all k; t; t;

qt

and

qfðk; t; tÞ

> 0; for all t; t and for k > ^k ðtÞ:

qt

**Hence (28) and (29) are consequences of the implicit function theorem as ap-
**

plied to the equation fðk; t; tÞ ¼ 0.

Now, if k min ðtÞ < k a ^k ðtÞ, then (30) follows from (27). On the other hand,

if ^

k ðtÞ < k < k max ðtÞ, then the limit limt!þy tðk; tÞ exists, because tðk; tÞ is a

monotonically increasing function of t for t > t. If (30) did not hold, i.e. if the

limit were ﬁnite, then the equation fðk; t; tÞ ¼ 0 would not hold in the limit as

t ! þy. r

**We observe that the discounted advertising cost over the interval ½0; t,
**

which is associated with the control function wt ðtÞ, deﬁned in the statement of

Theorem 2, is

8

>

> 1a

>

< weððcþrÞ=ð1aÞÞt ðeððcþarÞ=ð1aÞÞt 1Þ; t a t,

c þ ar

zðt; tÞ ¼ ð31Þ

>

> 1a w rt

>

: rt

wðe e ððcþrÞ=ð1aÞÞt rt

Þ þ ðe e Þ; t > t.

c þ ar r

**The discounted interval advertising cost function zðt; tÞ is a continuous func-
**

tion, strictly monotonically increasing in t for all t and strictly monotonically

decreasing in t for all t. Moreover, zðt; tÞ is di¤erentiable at all points such

that t 0 t.

Therefore, the optimal value of the advertising cost problem Iy ðk; tÞ, i.e.

the minimum discounted cost function Y ðk; tÞ, may be obtained from (31), for

k > k min ðtÞ, by substituting the variable t with the function tðk; tÞ, provided

by Theorem 2. To this end it has to be noted that

t a tðk; tÞ , k a ^

k ðtÞ: ð32Þ

**In the following corollaries we state some general results on the minimum dis-
**

counted cost function.

64 A. Buratto, B. Viscolani

**Corollary 2. The minimum discounted cost function
**

0; k ¼ kmin ðtÞ,

Y ðk; tÞ ¼ ð33Þ

zðtðk; tÞ; tÞ; kmin ðtÞ < k a kmax ðtÞ,

i) is continuous,

ii) is strictly monotonically increasing in k,

iii) is strictly monotonically decreasing in t, for k > ^k ðtÞ,

iv) has the limit

**lim Y ðk; tÞ ¼ 0; for all k < ks ; ð34Þ
**

t!þy

v) is di¤erentiable at all points such that k 0 ^k ðtÞ.

**Proof. The continuity of Y ðk; tÞ follows from the continuity of zðt; tÞ and
**

tðk; tÞ. The monotonicity properties (ii) and (iii) hold because the discounted

interval advertising cost function zðt; tÞ is strictly decreasing in t, for which

the previous Lemma holds. The limit of Y ðk; tÞ follows from the limit of tðk; tÞ

provided by the previous Lemma. The di¤erentiability statement (v) follows

from the di¤erentiability of zðt; tÞ, for t 0 t, and of tðk; tÞ, for k 0 ^k ðtÞ. r

We recall, in particular, that tðk max ðtÞ; tÞ ¼ 0 and hence

w

Y ðk max ðtÞ; tÞ ¼ zð0; tÞ ¼ ð1 ert Þ: ð35Þ

r

**A remarkable consequence of the above Corollary is that the problem of
**

minimizing the discounted advertising cost with free ﬁnal time has not any

optimal solution.

**Corollary 3. The minimum discounted cost function Y ðk; tÞ is strictly convex in
**

k for all t > 0.

**Proof. From Corollary 2 and Theorem 1 it follows that the function Y ðk; tÞ is
**

continuously di¤erentiable in k, as k 0 ^k ðtÞ. Then the sensitivity results for the

optimal value function and the adjoint function give qY ðk; tÞ=qk ¼ pðtÞ ([10],

p. 213). We observe that pðtÞ can be written as

w 1a ðcþrÞðttðk; tÞÞ

pðtÞ ¼ e ;

ab

it is a function of ðk; tÞ (some function compound with tðk; tÞ) which is strictly

increasing in k as t is strictly decreasing in k (Lemma 2). r

5 Solution of the bounded time problem

**Let us consider the new product introduction problem I ðkT ; TÞ with a
**

bounded time interval: T ¼ ½T1 ; T2 , 0 a T1 a T2 . A natural and correct way

to solve the problem I ðkT ; ½T1 ; T2 Þ is to use the Pontryagin Maximum Prin-

New product introduction 65

**ciple necessary conditions, as we have done for the minimum time problem
**

It ðk Þ and the advertising cost problem Iy ðk; TÞ. Nevertheless, most of the rel-

evant information on the optimal solution of problem I ðkT ; ½T1 ; T2 Þ, which is

obtainable from the Pontryagin conditions, has in fact been used to determine

the solutions to the problems It ðk Þ and Iy ðk; TÞ. Therefore we can exploit the

results of the analysis of Sections 3 and 4 in order to simplify the discussion of

the bounded time problem I ðkT ; ½T1 ; T2 Þ. In fact we argue in the present Sec-

tion that the original optimal control problem can be restated as a non-linear

programming problem and then solved by using the appropriate necessary

conditions and, possibly, some suitable numerical algorithms.

A ﬁrst equivalence result is provided by the following theorem which ex-

ploits the knowledge of the minimum discounted cost function Y ðk; tÞ.

**Theorem 3. The bounded time optimal control problem I ðkT ; ½T1 ; T2 Þ is equiv-
**

alent to the non-linear programming problem I ðkT ; ½T1 ; T2 Þ:

maximize f ðk; TÞ ¼ Sðk; T; Y ðk; TÞÞ; ð36Þ

subject to k A ½kT ; kmax ðTÞ; ð37Þ

T A ½T1 ; T2 ; ð38Þ

in the sense that

**a) if the problem I ðkT ; ½T1 ; T2 Þ has an optimal solution ðw ðtÞ; k ðtÞ; y ðtÞÞ
**

with ﬁnal time T , then ðk ðT Þ; T Þ is an optimal solution to the problem

I ðkT ; ½T1 ; T2 Þ and f ðk ðT Þ; T Þ ¼ Sðk ðT Þ; T ; y ðT ÞÞ;

b) if the problem I ðkT ; ½T1 ; T2 Þ has an optimal solution ðk ; T Þ, then the

optimal solution ðw ðtÞ; k ðtÞÞ to the minimum cost problem Iy ðk ; T Þ de-

termines, through the equation (3) and the initial condition (5), the optimal

solution ðw ðtÞ; k ðtÞ; y ðtÞÞ to the problem I ðkT ; ½T1 ; T2 Þ.

**Proof. a) Let ðw ðtÞ; k ðtÞ; y ðtÞÞ be an optimal solution of I ðkT ; ½T1 ; T2 Þ with
**

ﬁnal time T , then y ðT Þ ¼ Y ðk ðT Þ; T Þ, because of the deﬁnition of

Y ðk; tÞ and of the fact that S is decreasing in y. Moreover, Sðk ðT Þ; T ,

y ðT ÞÞ b Sðk; t; yÞ, for all ðk; t; yÞ which is the ﬁnal goodwill, time and

discounted advertising cost triplet associated with an admissible solution of

I ðkT ; ½T1 ; T2 Þ; in particular, Sðk ðT Þ; T ; y ðT ÞÞ b Sðk; t; Y ðk; tÞÞ, for all

ðk; tÞ which are feasible solutions to I ðkT ; ½T1 ; T2 Þ.

b) Let ðk ; t Þ, be an optimal solution of I ðkT ; ½T1 ; T2 Þ and let

ðw ðtÞ; k ðtÞÞ be an optimal solution of Iy ðk ; t Þ. The optimal value of the

**objective functional of the latter problem is Y ðk ; t Þ ¼ y ðt Þ, where y ðtÞ
**

is the function which is obtained from the integration of the equation (3)

with the initial condition (5). We have that Sðk ðt Þ; t ; y ðt ÞÞ ¼ f ðk ; t Þ ¼

Sðk ; t ; Y ðk ; t ÞÞ b Sðk; t; Y ðk; tÞÞ, for all ðk; tÞ which are feasible solutions

of I ðkT ; ½T1 ; T2 Þ. Hence, in view of the deﬁnition of Y ðk; tÞ, it follows that

Sðk ðt Þ; t ; y ðt ÞÞ b Sðk; t; yÞ, for all ðk; t; yÞ ¼ ðkð^t Þ; ^t; yð^t ÞÞ which is the

ﬁnal goodwill, time and discounted advertising cost triplet associated with

some admissible solution of I ðkT ; ½T1 ; T2 Þ. r

66 A. Buratto, B. Viscolani

An immediate consequence is the following existence result.

Corollary 4. If the admissibility condition

kT a kmax ðT2 Þ

is satisﬁed, then the bounded time problem has an optimal solution.

**Proof. The problem I ðkT ; ½T1 ; T2 Þ has an optimal solution, because it has a
**

continuous objective function f ðk; TÞ and a nonempty and compact feasible

set. Hence, the thesis follows from the equivalence between problems stated by

the Theorem 3. r

**A second equivalence result is provided by the following theorem which
**

exploits the knowledge of the discounted interval cost function zðt; tÞ and of

the goodwill function kt ðtÞ, that are associated with an advertising expenditure

rate function wt ðtÞ of the form (22).

Theorem 4. Let I~ðkT ; ½T1 ; T2 Þ denote the non-linear programming problem

maximize gðt; TÞ ¼ Sðkt ðTÞ; T; zðt; TÞÞ; ð39Þ

subject to kt ðTÞ b kT ; ð40Þ

t b 0; ð41Þ

T A ½T1 ; T2 ; ð42Þ

then the following implications hold:

**a) if wðtÞ 1 0 is an optimal control for the problem I ðkT ; ½T1 ; T2 Þ, then the
**

problem I~ðkT ; ½T1 ; T2 Þ has not any optimal solution;

b) if the problem I ðkT ; ½T1 ; T2 Þ has an optimal solution ðw ðtÞ; k ðtÞ; y ðtÞÞ

with ﬁnal time T and phase t , then ðt ; T Þ is an optimal solution to the

problem I~ðkT ; ½T1 ; T2 Þ and kt ðT Þ ¼ k ðT Þ, zðt ; T Þ ¼ y ðT Þ;

a ) if the problem I~ðkT ; ½T1 ; T2 Þ has no optimal solution, then the problem

0

**I ðkT ; ½T1 ; T2 Þ has the optimal control wðtÞ 1 0;
**

b 0 ) if the problem I~ðkT ; ½T1 ; T2 Þ has an optimal solution ðt ; T Þ, then

w ðtÞ ¼ wt ðtÞ is an optimal control for the problem I ðkT ; ½T1 ; T2 Þ.

**Proof. The components of a feasible solution ðt; TÞ of the problem
**

I~ðkT ; ½T1 ; T2 Þ are the ﬁnal time T and the phase t of a control wt ðtÞ of the

form (22), which determine the feasible goodwill function kt ðtÞ for the prob-

lem I ðkT ; ½T1 ; T2 Þ. Moreover, the value of the I~ðkT ; ½T1 ; T2 Þ objective func-

tion at ðt; TÞ is the value of the I ðkT ; ½T1 ; T2 Þ objective functional at the solu-

tion ðwt ðtÞ; kt ðtÞÞ with ﬁnal time T.

If I~ðkT ; ½T1 ; T2 Þ has an optimal solution ðt; TÞ, it is associated with an

optimal solution of I ðkT ; ½T1 ; T2 Þ under the requirement that the control has

the form (22). On the other hand, if I ðkT ; ½T1 ; T2 Þ has an optimal solution

New product introduction 67

**ðw ðtÞ; k ðtÞ; y ðtÞÞ with ﬁnal time T and ﬁnal goodwill k ðT Þ, then it must
**

be an optimal solution of the advertising cost problem Iy ðk ðT Þ; T Þ, so that

it must have the form (22), because of Theorem 2.

The control wðtÞ 1 0 may be optimal for the problem I ðkT ; ½T1 ; T2 Þ, if

kT a k min ðT1 Þ: in such a case the optimal control function has not the form

(22) for any real t and the problem I~ðkT ; ½T1 ; T2 Þ has not any optimal solu-

tion.

If kT > k min ðT1 Þ, then the problem I ðkT ; ½T1 ; T2 Þ has an optimal solution

with control w ðtÞ ¼ wt ðtÞ, for some t b 0: then the problem I~ðkT ; ½T1 ; T2 Þ

has a bounded feasible set and has the optimal solution ðt ; T Þ. If kT a

k min ðT1 Þ, then either the problem I ðkT ; ½T1 ; T2 Þ has the optimal control

w ðtÞ 1 0, and then T ¼ T1 and k ðT1 Þ ¼ k min ðT1 Þ, or I ðkT ; ½T1 ; T2 Þ has the

optimal control is w ðtÞ ¼ wt ðtÞ, for some t b 0: in the ﬁrst case the prob-

lem I~ðkT ; ½T1 ; T2 Þ has not any optimal solution, whereas in the second case it

has an unbounded feasible set, but has the optimal solution ðt ; T Þ. r

**We obtain in particular that the ﬁxed time new product introduction prob-
**

lem I ðkT ; fTgÞ has an optimal solution, as far as kT a k max ðTÞ. Such a prob-

lem is characterized by an exogenously given launch time and represents e.g.

those cases in which the product has to be introduced in the market on the oc-

casion of an exhibition or other special event. From the Theorems 3 and 4 we

can derive immediately two special representations of the problem I ðkT ; fTgÞ

as a 1-dimensional non-linear programming problem.

**Corollary 5. The ﬁxed time new product introduction problem I ðkT ; fTgÞ is the
**

problem of maximizing the function F ðkÞ ¼ f ðk; TÞ on the bounded interval

½kT ; kmax ðTÞ; it has an optimal control w ðtÞ and

i) either w ðtÞ 1 0,

ii) or w ðtÞ ¼ wt ðtÞ, for some t b 0.

In the latter case t is a maximum point of the function GðtÞ ¼ gðt; TÞ,

**ii.1) either on the bounded interval ½0; tðkT ; TÞ, if kmin ðTÞ < kT a kmax ðTÞ,
**

ii.2) or on the unbounded interval ½0; þy½, if kT a kmin ðTÞ.

**We recall that the objective functions f ðk; TÞ and gðt; TÞ of the nonlinear
**

programming problems I ðkT ; ½T1 ; T2 Þ and I~ðkT ; ½T1 ; T2 Þ are continuous and

so are F ðkÞ and GðtÞ from Corollary 5. The functions f ðk; TÞ and gðt; TÞ are

also continuously di¤erentiable except at the points ð^k ðTÞ; TÞ, the ﬁrst one,

and ðt; tÞ, the second one. No general monotonicity or concavity properties of

the objective functions hold: therefore we cannot state a priori any su‰ciency

or uniqueness result for the optimal solutions.

The feasible set of probem I ðkT ; ½T1 ; T2 Þ is compact and convex, whereas

the one of problem I~ðkT ; ½T1 ; T2 Þ may be compact and convex as well as not.

As for the I ðkT ; fTgÞ-equivalent 1-dimensional problems, we observe that

the objective functions F ðkÞ and GðtÞ are continuously di¤erentiable except at

the points ^ k ðTÞ, the ﬁrst one, and T, the second one. In general we cannot

state whether F ðkÞ and GðtÞ are concave or not.

68 A. Buratto, B. Viscolani

6 Conclusion

**We have considered the control problem of determining an optimal advertis-
**

ing policy for preparing the launch of a new product. The objective functional

depends on the goodwill level at the launch time, the launch time and the total

discounted advertising cost. The solutions of two special instances, namely the

minimum time problem and the minimum discounted advertising cost prob-

lem, allow us to represent the original problem as a non-linear programming

one. In fact, we have obtained two di¤erent non-linear programming repre-

sentations of the original control problem. From them, on one hand, we have

proved the existence of an optimal solution of the bounded time control prob-

lem. On the other hand, the non-linear programming problems are the natural

way to ﬁnd an optimal solution, by using some suitable numerical method. A

numerical analysis of the optimal solutions for special instances of the utility

function Sðk; t; yÞ is the natural prosecution of the present research.

Here, two real parameters allow the model to represent a variety of good-

will dynamics, but di¤erent goodwill motion equations might be considered

inside the same general framework. On the other hand, certain real life adver-

tising practices might be better represented by a discrete time model.

A relevant extension of the work should concern the advertising campaign

for the entire launch time period and not only for the one which precedes im-

mediately the sales. This would lead to a two phase problem in which, at the

launch time T, the further advertising policy should be planned taking into

account both the foreseeable sales and the goodwill obtained in the previous

period.

**Acknowledgements. We thank Francesco Casarin, for some useful management comments, and
**

Paolo Pellizzari, for an illuminating observation concerning the non-linear programming repre-

sentation of the new product introduction problem.

References

**1. Buratto A, Viscolani B (1994) An optimal control student problem and a marketing coun-
**

terpart. Mathematical and Computer Modelling 20:19–33

2. Buratto A, Viscolani B (1996) Errata to: An optimal control student problem and a marketing

counterpart. Mathematical and Computer Modelling 23:123

3. Collesei U (1994) Marketing. CEDAM, Padova

4. Datar S, Jordan C, Kekre S, Rajiv S, Srinivasan K (1997) New product development struc-

tures and time to market. Management Science 43:452–464

5. Feichtinger G, Hartl RF, Sethi SP (1994) Dynamic optimal control models in advertising:

recent developments. Management Science 40:195–226

6. Hendricks KB, Singhal VR (1997) Delays in new product introductions and the market value

of the ﬁrm: the consequences of being late to the market. Management Science 43:129–142

7. Kotler P (1997) Marketing Management: Analysis, Planning, Implementation, and Control.

Prentice-Hall, Upper Saddle River

8. Lilien GL, Kotler P, Moorthy KS (1992) Marketing models. Prentice-Hall, Englewood Cli¤s

9. Nerlove M, Arrow KJ (1962) Optimal advertising policy under dynamic conditions. Eco-

nomica 29:129–142

10. Seierstad A, Sydsaeter K (1987) Optimal control theory with economic applications. North-

Holland, Amsterdam

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