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Advertising Budget Decisions: The Content of This Supplementary Note Links With Chapter 16 (Page 372)
Advertising Budget Decisions: The Content of This Supplementary Note Links With Chapter 16 (Page 372)
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ADVERTISING BUDGET DECISIONS
The content of this supplementary note links with Chapter 16 (page 372)
Conceptually, advertising budget decisions can be analysed using marginal rules of economic theory. Expenditure on each method of communication is increased until any further increase reduces profits. Similarly, the allocation of total budget between different methods is such that each instrument is used to the level where all marginal revenues are equal. Economists have developed optimisation rules based on elasticitys (Dorfman and Steiner, 1954), also extended to situations of oligopoly (Lambin et al., 1975), as well as dynamic models to allow for lagged response to advertising (Palda, 1963; Jacquemin, 1973). The derivation of the optimisation rule for the advertising budget is illustrated on Table Web 12.1 (see page 4). As for the selling price, this approach is rarely operational in practice because of all the problems of estimating response functions (see Chapter 15 for further information on this). It is therefore necessary to use other more general methods, and to use only marginal rules as guidelines. When available, the analysis of elasticity can be useful a posteriori to evaluate the effectiveness of advertising and of the sales force. In this section we will examine different methods of determining the advertising budget.
Cost-oriented advertising budgets Cost-oriented budgets are calculated on the basis of cost considerations, without explicitly taking demand reactions into account. There are three types of cost-oriented budget: