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© J.C.

Baltzer AG, Science Publishers
Optimal advertising with a continuum of goods
5
Emilio Barucci
a
and Fausto Gozzi
b
a
DIMADEFAS, Università di Firenze,
Via C. Lombroso 6͞17, I-50134 Firenze, Italy
E-mail: barucci@stat.ds.unifi.it
b
Dipartimento di Matematica, Università di Pisa,
Via F. Buonarroti 2, I-56127 Pisa, Italy
E-mail: gozzi@dm.unipi.it
In this paper, we present a model of optimal advertising with a continuum of goods
differentiated by their vintage. The model is an infinite horizon infinite dimensional optimal
control model and the firm advertises a continuum of goods. We prove that the goodwill of
a good accumulated through advertising does not necessarily reach its maximum when it is
launched onto the market: it can be a single peaked function of the good vintage.
Keywords: optimal advertising, infinite dimension, infinite horizon, optimal control
AMS subject classification: 90A11, 49J20; JEL C61, C62, E22
1. Introduction
Following the classical paper by Nerlove and Arrow [12], extensive literature on
the dynamics of optimal advertising has appeared, see Gould [7] and Jorgensen [9].
The optimal advertising problem for a firm maximizing the profits in the long run has
been analyzed assuming that the consumer demand is a function of the price of the
good and of the goodwill which summarizes the effect of past advertising on consumer
behavior. Assuming that the firm sells a unique homogeneous good, the advertising
problem has been handled by means of standard optimal control techniques (the firm’s
profit over an infinite horizon is maximized subject to a controlled differential equation
describing the goodwill accumulation). In what follows, we assume that the firm sells
a continuum of goods; specifically, we assume that new goods are continuously
launched by the firm onto the market. Therefore, at time t the firm sells a continuum
5
Thanks are due to the Vienna workshop participants for comments; the usual disclaimers apply.
Annals of Operations Research 88(1999)15–29 15
16 E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods
of goods differentiated by their vintage s. By A(t, s), we denote the stock of goodwill
for goods of vintage s accumulated at time t; a(t, s) represents the advertising rate at
time t for the goods of vintage s and we assume that the advertising rate is non-
negative, a(t, s) ≥ 0, ∀t, s ≥ 0. We assume that the demand function for goods of
vintage s is only affected by the goodwill specific to that vintage good and not by the
goodwill of other vintage goods.
The goodwill accumulation process is described by the following controlled
dynamical system:
where µ > 0 and s ∈(0, +
ϱ
]. t stands for time (t ≥ 0) and s as for vintage (s ≥ 0);
s′ > s means that goods indexed by s′ are older than goods indexed by s. The maxi-
mum vintage considered in the analysis is s , it is assumed that goods older than s no
longer have a market; s can also be infinite. λ(s) is the parameter describing the linear
technology through which the goodwill is accumulated from advertising, λ(s) ≥ 0,
∀s ∈[0, s ]. We assume that advertising young goods is more productive than
advertising old goods, i.e. λ′(s) ≤ 0, ∀s ∈[0, s ], and a single-peaked shape for λ(s)
can also be assumed (i.e. λ first increasing in s and then decreasing). a(t, 0) represents
the advertising rate at time t for a new good and also defines the boundary condition
for the evolution of the goodwill; the goodwill for a new good is given by the instantan-
eous advertising rate multiplied by λ(0). A
0
(s) represents the initial goodwill condition
for goods with different vintage.
The Partial Differential Equation (PDE) (1) generalizes the classical dynamical
system describing the goodwill accumulation in the optimal advertising literature, i.e.
˙
A (t) = a(t) – µA(t). With respect to this equation, the PDE (1) relates the flow of time
to the vintage of the stock of goodwill. Leaving aside the decay rate component and
the control in (1), the stock of goodwill at time t of a good of vintage s becomes, after
the time period δt, the stock of goodwill of a good of vintage s + δt, i.e. A(t, s) =
A(t + δt, s + δt).
The goodwill represents a proxy of the extent of the market for the good, e.g. the
number of people who are aware of the good. The firm operates in a monopolistic
regime, given the stock of goodwill at time t for a good of vintage s, and therefore the
extent of the market to which the firm has access, A(t, s), the quota part of the people
in the market buying the good and their demand is determined by the prices the firm
establishes, p(t, s), s ∈[0, s ]. The demand for a good of vintage s per unit of goodwill
is f (s, p(t, [0, s ])) (here p(t, [0, s ]) stands for the image of the map p(t, ·)), where we
allow for a substitution among goods of different vintage (the demand for a good of a
given vintage also depends on the prices of the goods with different vintage). This

∂A(t, s)
∂t
+
∂ A(t, s)
∂s
+ µA(t , s) · λ(s)a(t , s), t ∈(0, +
ϱ
), s ∈[0, s ],
A(t, 0) · λ(0) a(t, 0), t ∈(0, +
ϱ
),
A(0, s) · A
0
(s), s ∈[0, s ],
¹
'
¹
¹
¹
¹
¹
(1)
formalization of the agent demand is general and it incorporates the agent’s budget
constraint.
The firm’s profit at each instant of time is the integral over the domain of the
goods [0, s ] of the returns the firm realizes from each good minus two different kinds
of costs: advertising costs, described by the unit cost q(s), q(s) ≥ 0, ∀s ∈[0, s ], and
adjustment costs. Adjustment costs are a quadratic function of the advertising rate
with a coefficient β(s), β(s) ≥ 0, ∀s ∈[0, s ]. For new goods, the firm bears an extra
quadratic cost with coefficient β
0
, β
0
> 0; with β(0), we represent adjustment costs
for advertising in new goods and with β
0
we represent an innovation cost. Innovation
costs can be explained considering the fact that one has to pay to launch a new product;
we assume that this extra cost has only to be paid for new goods.
The instantaneous profit at time t becomes
and the entrepreneur’s objective function becomes

J( A
0
; a, p) ·
0
+ ϱ


1
e
− ρt
− β
0
a
2
(t, 0)



+
0
s


1
[ A(t, s) f ( s, p(t, [0, s ]))p(t, s) − q(s)a(t, s) − β(s)a
2
(t, s)]d s
]
]
]
]
dt (3)
over all state–control triples {A, a, p} which are solutions in a suitable sense of equa-
tion (1), with a(t, s) ≥ 0, ∀t ≥ 0, ∀s ≥ 0. We study the problem without positivity
constraints on A. The reason for this is that we focus our attention on a neighborhood
of the long-run equilibrium, which is assumed to be strictly positive. The optimization
problem (3) in p and a can be decoupled solving the static maximization in (2) with
respect to p given A, and then studying the original dynamical problem with respect
to a. From the first optimization problem, we have in an abstract way that the
profit per unit of goodwill can be described by a time invariant function of s, γ (s) =
max
p(t , [ 0 , s ])
f (s, p(t, [0, s ]))p(t, s), and the maximization problem (3) becomes
(4)

J( A
0
; a) ·
0
+ ϱ


1
e
− ρt
− β
0
a
2
(t , 0) +
0
s


1
[A(t, s)γ (s) − q(s)a(t , s) − β(s)a
2
(t , s)]d s




]
]
]
]
d t
over all state–control couples {A, a} which are solutions in a suitable sense of equa-
tion (1), with a(t, s) ≥ 0, ∀t ≥ 0, ∀s ≥ 0. The shape of γ (s) and of q(s) and of β(s) is
assumed to be similar to the one of λ(s): γ ′(s), q′(s), β′(s) ≤ 0, ∀s ∈[0, s ]; it is less
expensive to advertise vintage goods rather than new goods, and a unit of goodwill
0
s


1
[ A(t, s) f (s, p(t, [0, s ]))p(t, s) − q(s)a(t, s) − β(s)a
2
(t, s)]ds (2)
E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods 17
for new goods is more profitable than a unit of goodwill for vintage goods. If s = +
ϱ
,
then we assume that γ (s), β(s), q(s) are integrable in [0, +
ϱ
) and so they go to zero
as s → +
ϱ
. The problem can be studied also assuming time-dependent parameters.
We prove the existence of the optimal advertising policy and of a long-run
stationary equilibrium. The long-run stationary goodwill equilibrium is either a strictly
decreasing function of the vintage or a single-peaked function first increasing and
then decreasing with a maximum; this depends on the parameters of the model. In the
latter case, we have that the goodwill for a good (or if one wants the extension of the
market for a good) does not reach its maximum when it is launched onto the market,
but only after some length of time.
The paper is organized as follows. In section 2, we present the state equation
through the semigroups language. In section 3, we analyze the optimal control prob-
lem. In section 4, we study the optimal advertising trajectory and the long-run
equilibrium. In the appendix, we present the technicalities needed in our analysis.
2. The state equation
In what follows, we study the state equation of our model in an infinite-dimen-
sional setting through the semigroups language. For notations, symbols and some
preliminaries, see the appendix. Fix s ∈(0, +
ϱ
] and consider a controlled dynamical
system whose behavior is described by the partial differential equation (1) in the strip
[0, +
ϱ
) × [0, s ] (when s = +
ϱ
, we will substitute everywhere the intervals [0, s ]
and (0, s ] with [0, +
ϱ
) and (0, +
ϱ
), respectively), where a : [0, +
ϱ
) × [0, s ] → ޒ
+
is the control function and A : [0, +
ϱ
) × [0, s ] → ޒ is the state function. We want to
express this Partial Differential Equation (PDE) as an Ordinary Differential Equation
(ODE) in the Hilbert space L
2
= L
2
(0, s ). In the following, we will often omit the
variable s: A(t), a(t) will denote the elements A(t, ·), a(t, ·) ∈L
2
; we will employ the
variable s only when it is needed to avoid misunderstandings.
Consider the following linear closed operator A on L
2
associated with the
PDE (1):
D(A) = { f ∈H
1
: f (0) = 0}, Af (s) = – f ′ (s) – µ f (s). (5)
A semigroup T(t) is associated to the PDE (1); T(t) and its properties are described in
the following proposition.
Proposition 1. The operator A is a linear closed dissipative operator on L
2
and gener-
ates a strongly continuous semigroup T(t) given by

[T(t ) f ] (s) · e
− µ t
f (s − t )I
{s≥ t}
for t ∈[0, s ], and [T(t) f ]( s) = 0, ∀s ∈[0, s ], if t > s . The resolvent set of A contains
the half plane {Re η > – µ}. For Re η > – µ, f ∈H, s ∈(0, +
ϱ
], we have
18 E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods
Let A
*
be the adjoint operator of A. The following proposition can be stated
about A
*
.
Proposition 2. The operator A
*
is given by

[ R(η; A) f ] (s) ·
0
+ ϱ


1
e
− ηt
[T (t ) f ] (s)d t ·
0
s


1
e
− (η+ µ) (s − σ)
f (σ)dσ, s ∈[0, s ].

D(A
*
) · { f ∈H
1
: f (s ) · 0}, [A
*
f ] (s) · ′ f (s) − µ f (s),
when s < +
ϱ
. When s = +
ϱ
, we have that lim
s →+
ϱ
f (s) = 0 for f ∈H
1
(0, +
ϱ
), so
that

D( A
*
) · H
1
, [A
*
f ] (s) · ′ f (s) − µ f ( s).
The operator A
*
is the generator of the strongly continuous semigroup T
*
(t) (which
is the adjoint of T(t)) on L
2
. When s < +
ϱ
, T
*
(t) is given by

[T
*
(t ) f ] (s) · e
− µt
f (s + t) I
{s ≤ s − t}
for t ∈[0, s ] and [T
*
(t)] f (s) = 0, ∀s ∈[0, s ], if t > s . The resolvent set of A
*
always
contains the half plane {Re η > – µ}. For Re η > – µ, f ∈H, s ∈(0, +
ϱ
], R(η; A
*
) is
given by

[R(η; A
*
) f ] (s) ·
0
+ ϱ


1
e
− ηt
[T
*
(t ) f ] (s)d t ·
s
s


1
e
− (η + µ)(σ − s)
f (σ )dσ, s ∈[0, s ].
For a proof of the above propositions, see e.g. Pazy [13, pp. 7, 11, 41, 44].
We now want to write the solution of the state equation (1). To handle the control
problem with the boundary condition A(t, 0) = λ(0)a(t, 0), the control strategy has
to be well defined at s = 0 for every t ≥ 0. We will assume that a ∈L
ϱ
(0, +
ϱ
; ޒ) ×
L
ϱ
(0, +
ϱ
; L
2
), which allows us to take care of the initial condition at s = 0. This choice
allows us to use strategies measurable in t and piecewise continuous (right continuous
with left limit) in s.
First, let a(t, 0) ≡ 0 for every t ≥ 0. Then, as usual (see e.g. [13, section 4.2], we
define the mild solution of (1) as the continuous function A : [0, +
ϱ
) → L
2
,

A(t ) · T(t )A
0
+
0
t


1
T(t − τ )B
λ
a(τ)dτ. (6)
The solution of (1) can be written in integral form when a(t, 0) / ≡ 0 by a standard
procedure, see Bensoussan et al. [2]. Denoting by w(t, ·) the unique element of H
1
such that
E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods 19
(it is easy to check that w(t, s) = w
0
(s)λ(0)a(t, 0), where w
0
(s) = e
–µs
), then the mild
solution of (1) becomes
∂w
∂s
(t, s) + µw(t, s) · 0, w(t, 0) · λ(0) a(t, 0)

A(t) · T(t )A
0
− A
0
t


1
T (t − τ)w(τ)dτ





]
]
]
]
]
+
0
t


1
T(t − τ )B
λ
a(τ)dτ, (7)
which, by standard calculations, can be written more explicitly as

A(t , s) · e
− µt
A
0
(s − t )I
{s ≥ t}
− e
− µs
λ(0) a(t − s, 0)I
{s < t}
+
0
t ∧s


1
e
− µr
λ(s − r)a(t − r, s − r)dr. (8)
In the following, we will denote by A(t; A
0
, a) the mild solution of (1) for given data
A
0
, a. We will omit the data, simply writing A(t), when no confusion is possible.
The expression of the state A(t) in (7) is made up of three components. The first
component represents the effect on the state variable at time t of the initial state point.
The second component represents the effect of A(τ, 0) = λ(0)a(τ, 0) ≠ 0, 0 < τ ≤ t, on
the state at time t. The third component describes the effect of advertising at time τ,
0 < τ < t, on A(t).
Given the framework described above, equation (1) can be written in the follow-
ing differential form:

′ A (t ) · A[ A(t ) − w(t)] + B
λ
a(t ), A(0) · A
0
, (9)
which does not make sense in the space L
2
. In fact, the term –Aw(t) = –Aw
0
λ(0)a(t, 0),
which is the effect of A(t, 0) = λ(0)a(t, 0) ≠ 0 on A′(t), is not a function in the space
L
2
. More precisely, – Aw
0
is a distribution and is equal to the Dirac delta function,
so we can write – Aw
0
λ(0)a(t, 0) = δ
0
λ(0)a(t, 0). By using extrapolation spaces as
described in Nagel and Sinestrari [11], it is possible to give a meaning to equation (9)
in a suitable space of distributions when a ∈L
ϱ
(0, +
ϱ
; ޒ) × L
ϱ
(0, +
ϱ
; L
2
); we omit
the proof for brevity. We only mention that to give a meaning to equation (9) in this
general framework, we have to define suitable extensions of the operator A and of
the corresponding semigroup T. In the rest of the paper, these extensions will be
denoted by the same symbols, for simplicity.
3. The optimal control problem
Let us assume that β
0
∈ޒ, γ, β and q are bounded elements of H
2
. Moreover, we
make the following assumption.
20 E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods
Assumption 1.
(i) For every s ∈[0, s ], we have γ (s ) = 0, γ (s), q(s) ≥ 0 and β
0
, β(s) ≥ ε > 0 for a
given ε > 0.
(ii) γ ′(s) ≤ 0, q′(s) ≤ 0, β′(s) ≤ 0.
We consider the functions g : L
2
→ ޒ, l : H
1
→ ޒ,

g( A) ·
0
s


1
γ (s) A(s)ds · 〈γ , A〉
L
2
,
l(a) ·
0
s


1
[− q(s)a(s) − β(s)a
2
)s)]d s − β
0
a
2
(0) · − 〈q, a〉
L
2
− 〈B
β
a, a〉
L
2
− β
0
a
2
(0),
where B
β
: L
2
→ L
2
is the continuous linear operator defined as [B
β
f ](s) = β(s) f (s),
s ∈[0, s ]. As pointed out in the previous section, we assume that the control strategy
a belongs to the set U ·
def
{a ∈L
ϱ
(0, +
ϱ
; ޒ) × L
ϱ
(0, +
ϱ
; L
2
); a ≥ 0}. The optimal
control problem becomes

(P) maximize the functional J( A
0
; a) ·
0
+ ϱ


1
e
− ρτ
[g( A(τ)) + l(a(τ))]dτ (10)
over all control trajectories a ∈U, where A is the corresponding mild solution of the
state equation (1). A control strategy a
*
∈U is an optimal strategy if J(A
0
; a
*
) ≥
J(A
0
; a), ∀a ∈U. A state–control pair (A
*
, a
*
) is an optimal pair if a
*
is an optimal
control strategy and A
*
is the corresponding state trajectory. The value function of the
problem is defined as υ(A
0
= sup
u∈U
J(A
0
; a).
For p ∈D(A
*
), the current value Hamiltonian F
0
is given by

F
0
( a, p) ·
def
− a(0) 〈w
0
, A
*
p〉
L
2
+ 〈B
λ
a, p〉
L
2
+ l(a) (11)
and the maximum value Hamiltonian H
0
is given by

H
0
( p) · sup
a∈R× L
2
, a≥ 0
F
0
(a, p). (12)
Following Fleming and Soner [6], the current value Hamiltonian is defined as
F
1
(a, p, A) = F
0
(a, p) + g(A) – A, A
*
p
L
2. To describe the solution of the model, we
introduce the function

γ (s) · [ R(ρ; A
*
)γ ] (s) ·
s
s


1
e
− (ρ + µ) (σ − s)
γ (σ)dσ, (13)
where γ (s) is the discounted return associated with a unit of goodwill for goods of
vintage a. As time passes, the return for a unit of goodwill of goods of vintage σ ≥ s,
E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods 21
γ (σ), is associated with a unit of goodwill for goods of vintage s. We remember that
the connection between the vintage of a good and the flow of time is δs = δt. This
means that a good of vintage s will be of vintage σ > s after the time period σ – s, and
the discounted return associated with a unit of goodwill for goods of vintage s for
being of vintage σ after the time period σ – s is e
–ρ(σ–s)
γ (σ); meanwhile, a unit of
goodwill is exponentially decreased and amounts to e
–µ(σ–s)
. Therefore, the discounted
return of a unit of goodwill for goods of vintage s for being of vintage σ after the time
period σ – s becomes e
–( ρ+µ)( σ–s)
γ (σ), which is the integrand of (13). After some
tedious calculations, the functional J can be rewritten as follows:

J(A
0
, a) · 〈γ , A
0

L
2
+
0
+ ϱ


1
e
− ρt
F(a(t ))d t, (14)
where

F(a) · F
0
(a, γ ) · − 〈A
*
γ , w
0
〉λ(0) a(0) − β
0
a
2
(0)
+ 〈− q + B
λ
γ , a〉
L
2
− 〈B
β
a, a〉
L
2
. (15)
Concerning the existence of the optimal control, we have the following result, proved
in the appendix.
Proposition 3. There exists only one optimal strategy a
*
for problem (P). The optimal
strategy a
*
does not depend on the initial state A
0
and time t, and is given by
a
*
(0) ·
λ(0)γ (0)

0
, a
*
(s) ·
[λ(s)γ (s) − q( s)]
+
2β(s)
, ∀s > 0; (16)
a
*
satisfies the following Maximum Principle:

F
0
(a
*
, γ ) · sup
a ∈ޒ × L
2
, a≥ 0
F
0
(a, γ ) · H
0
(γ ) (17)
and is continuous in s if and only if the following condition is satisfied:
λ(0)
γ (0)

0
·
1
2β(0)
[λ(0)γ (0) − q(0)] > 0. (18)
The model being characterized by constant returns to scale with respect to the
goodwill, the optimal control strategy is constant over time. About a
*
(0), we have that
it is an increasing function of λ(0), γ (s), ∀s ∈[0, s ], decreasing in ρ, µ and β
0
. Thanks
to assumption 1, a
*
is a function of L
2
and is differentiable almost everywhere for s > 0.
From the optimal control expression, it follows that a
*
> 0 if and only if λγ – q > 0,
i.e. advertising for goods of a specific vintage is strictly positive if and only if the
associated discounted return multiplied by the technology factor λ is strictly larger
than the unit advertising cost. In the intervals where this happens, ceteris paribus, a
22 E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods
larger discount factor ρ or a larger decay rate µ lead to a lower level of advertising;
the same thing happens if β(s) is increased. On the other hand, if λ(s), γ (s), s ∈(0, s )
are increased, then the level of advertising becomes larger. In the general case, nothing
can be said a priori about (a
*
)′(s), which depends on the behavior of γ (s), q(s) and
β(s); when (λγ )′(s) ≤ 0 and β(s) and q(s) are constant, then (a
*
)′(s) ≤ 0. Since γ ′(s) ≤ 0
implies γ ′(s) ≤ 0, then (λγ )′(s) ≤ 0 when λ and γ are decreasing.
In the above analysis, we have considered the case λ′(s) ≤ 0, γ ′(s) ≤ 0, ∀s ∈
[0, s ]. This assumption does not take into account the so-called learning or experience
effect, i.e. the productivity of goodwill increases as time passes because of extern-
alities, learning by doing, etc. However, λ(s), γ (s) first increasing in s and then
decreasing can be easily introduced in our setting.
4. Optimality conditions, the long-run equilibrium
In this section, we study the optimality conditions for the problem and then
we show the existence of a stationary long-run equilibrium. The maximum value
Hamiltonian H
0
can be split into two parts due to the presence of the boundary control
term and to the linearity of the problem. For p ∈D(A
*
), the Hamiltonian function
H
0
( p) can be written as

H
0
( p) · H
01
(〈w
0
, A
*
p〉
L
2
) + H
02
( p),
where we have set, for α ≤ 0 and p ∈L
2
,

H
01
(α) · sup
r ∈ޒ
+
[− rλ(0)α − β
0
r
2
] ·
λ
2
(0)α
2

0
,
H
02
( p) · sup
a∈L
2
a≥ 0
[〈a, B
λ
p − q〉
L
2
− 〈B
β
a, a〉
L
2
] ·
1
4
〈B
1 β
(B
λ
p − q)
+
, (B
λ
p − q)
+

L
2
.
Since a
*
maximizes the current value Hamiltonian F
0
, it can easily be checked that it
satisfies

a
*
(0) · DH
01
(〈w
0
, A
*
γ 〉
L
2
) · DH
01
(γ (0)), a
*
(s) · DH
02
(γ ) (s); s ∈(0, s ].
The Maximum Principle can be stated as in Barucci and Gozzi [1]. We recall it here in
its Hamiltonian form. For similar results, see Cannarsa and Tessitore [4], Gozzi and
Tessitore [8], Fattorini [5], Lasiecka and Triggiani [10] and the appendix for a sketch
of the proof.
Theorem 4. Let (A
*
, a
*
) be the optimal pair for problem (P). Then there exists a
function p
*
∈L
ϱ
(0, +
ϱ
; L
2
) such that (A
*
, p
*
) is a mild solution of the following
system (which only makes sense in integral form):
E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods 23
satisfying the transversality condition

lim
t →+ϱ
e
− ρt
p(t) · 0. (20)
The solution (A
*
, p
*
) of the system (19)–(20) is unique and is given by

p
*
(t ) · γ ;
A
*
(t ) · T (t) A
0
− λ(0)a
*
( 0 ) [ T (t) − I ]w
0
− R(0; A) [T (t ) − I ]B
λ
a
*
,
where a
*
is given by (16). The system (19) has only one stationary equilibrium point
(A
ϱ
, p
ϱ
),

A
ϱ
· R(0; A)B
λ
a
*
+ λ(0) a
*
(0) w
0
,
p
ϱ
· R(ρ; A
*
)γ · γ .
The transversality condition (20) above implies the classical transversality condi-
tion lim
t →+
ϱ
e
–ρt
A(t), p(t) = 0. γ can be interpreted as the costate variable since we
have that p
*
(t) = R(ρ, A
*
)γ = γ , ∀t ≥ 0; the marginal value associated by the optimal
control a
*
to the state along the optimal trajectory A
*
is the discounted return γ . The
only solution of (19) that satisfies the transversality condition is characterized by a
constant p(t) : p(t) = R(ρ; A
*
)γ = γ , t ≥ 0. This means that (A, p) = (A, γ ) in the phase
space L
2
× L
2
is the stable manifold of the stationary equilibrium point (A
ϱ
, p
ϱ
) of
system (19). If p
0
= γ , then for every A
0
> 0 the solution of system (19) converges to
(A
ϱ
, p
ϱ
) as t → +
ϱ
.
In Barucci and Gozzi [1], it is shown in a similar framework that the Turnpike
Property holds, i.e. the optimal state–costate trajectory of the finite horizon problem
belongs to a neighborhood of the optimal trajectory for the infinite horizon problem
(A
ϱ
, p
ϱ
) for a given period of time.
The long-run stationary equilibrium is given by

p
ϱ
(s) · γ (s) · R(ρ; A
*
)γ (s) ·
s
s


1
e
− (ρ + µ) (σ − s)
γ (σ)dσ,
A
ϱ
(s) · R(0; A)B
λ
a
*
(s) + λ(0) a
*
(0) w
0
(s)
·
0
s


1
e
− µ(s − σ)
λ(σ)a
*
(σ)dσ + λ(0)a
*
(0)e
− µs
,

′ A (t ) · AA(t ) − DH
01
(〈w
0
, A
*
p(t )〉
L
2 )Aw
0
λ(0) + B
λ
DH
02
( p(t));
A(0) · A
0
,
′ p (t ) · [ρ − A
*
] p(t ) − γ ,
¹
'
¹
¹
¹
¹
¹
(19)
24 E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods
where a
*
is given by (16). In what follows, we assume that λ(0) γ (0) – q(0) > 0, the
discounted return associated with advertising in a new good, λ(0) γ (0), is larger than
the unit advertising cost, q(0).
Let us remark that we have studied the problem without explicitly imposing a
positivity constraint on the state variable; in the following, we restrict our attention to
the analysis of a stationary equilibrium (A
ϱ
, p
ϱ
) characterized by a positive solution,
i.e. A
ϱ
(s) > 0. The optimal advertising path obtained from the optimal control problem
supplies two interesting pieces of information: the optimal advertising path and the
optimal long-run stock of goodwill. Because our model is linear-quadratic, the optimal
advertising policy is constant over time. The analysis of the long-run stationary equi-
librium confirms the analysis developed in the literature for the finite dimensional
case. In that setting, a well-established result states that the optimal stock of goodwill
is a decreasing function of the discount factor and of the interest rate. The result is
confirmed in the infinite-dimensional setting. For every s ∈(0, s ), we have that A
ϱ
(s)
is decreasing in β
0
, ρ, µ, β(σ) and q(σ) with σ ∈[0, s), and increasing in λ(σ), γ (σ)
with σ ∈[0, s ]. Note that if a
*
(s) = 0 for s ∈(s
1
, s
2
), then in such an interval A
ϱ
(s) is
strictly decreasing in s; more precisely, A
ϱ
(s) = A
ϱ
(s
1
)e
–µ(s –s
1
)
, ∀s ∈(s
1
, s
2
). Let us
remark that A
ϱ
(0) = λ
2
(0) γ (0) 2β
0
, therefore we have that the goodwill for new goods
is decreasing in µ, ρ and β
0
, and increasing in λ(0) and γ (s), ∀s ∈[0, s ]. This reason-
ing can be replicated in a neighborhood of 0
+
of s. From easy calculations, we obtain
the following proposition.
Proposition 5. Let assumption 1 be satisfied. Then the optimal control a
*
is continu-
ously differentiable on (0, s ) (possibly discontinuous at s = 0). The function A
ϱ
belongs to H
1
and its derivative A′
ϱ
is continuously differentiable out of s = 0. A
ϱ
is
the unique solution of the equation
′ A (s) + µA(s) · λ(s)a
*
(s), s > 0; A(0) · λ(0) a
*
(0) ·
λ
2
(0)γ (0)

0
. (21)
It follows that
and, defining A′
ϱ
(0
+
) ·
def
lim
s →0
+ A′
ϱ
(s),

′ A
ϱ
(s) · − µe
−µs
λ(0)a
*
(0) + λ(s)a
*
(s) − µR(0; A) (λa
*
) (s)

′ A
ϱ
(0
+
) · −
µλ
2
(0)γ (0)

0
+ λ(0)
λ(0)γ (0) − q(0)
2β(0)
·
λ
2
(0)γ (0)
2
1
β(0)

µ
β
0



]
]
]

q(0)λ(0)
2β(0)
. (22)
The shape of A
ϱ
(s) can have different characterizations. The following proposi-
tion can be stated, see the appendix for a proof.
E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods 25
Proposition 6. If (λa
*
)′ (s) ≤ 0, ∀s ∈(0, s ), then we have


′ A
ϱ
(0
+
) ≤ 0 ⇒ ′ A
ϱ
(s) ≤ 0, ∀s ∈[0, s ];


′ A
ϱ
(0
+
) > 0 ⇒ A
ϱ
(s) is single-peaked, there exists a point s
0
∈(0, s ) such that
A′
ϱ
(s
0
) = 0, A′
ϱ
(s
0
) > 0 for s < s
0
and A′
ϱ
(s) ≤ 0 for s > s
0
.
If the parameters of the model generate a flow of advertising decreasing in s,
(a
*
)′(s) ≤ 0 and λ′ ≤ 0, then the optimal goodwill A
ϱ
(s) can only be monotonically
decreasing or single peaked with a maximum in s
0
, increasing for s < s
0
and decreasing
for s > s
0
. From the analysis of (22), it turns out that if λ(0)γ (0) – q(0) 0 and λ(0),
β
0
are sufficiently high, then A′
ϱ
(0
+
) > 0 and A
ϱ
(s) is single peaked with a maximum
in s
0
. So, if a unit of goodwill for a new good is highly profitable, advertising in new
goods is highly productive and there is a high innovation cost, then we have a single-
peaked goodwill shape. The goodwill for a good reaches its maximum, not necessarily
when it is launched onto the market, but after a length of time.
Let us remark that A′
ϱ
(0
+
) is decreasing in µ, q(0), and β(0), while it is increasing
in β
0
. With regard to the other parameters, the sensitivity analysis depends on the sign
of the term (1 β(0)) – (µ β
0
). If this term is negative, then A′
ϱ
(0
+
) is negative and
decreasing in λ(0), γ (s), ∀s ∈[0, s ] and increasing in ρ. If (1 β(0)) – (µ β
0
) is
positive, then A′
ϱ
(0
+
) is increasing in γ (s), ∀s ∈[0, s ] and λ(0) (after a threshold)
and decreasing in ρ.
If µ is high, then the optimal stock of goodwill is strictly decreasing in s, as the
goodwill quickly depreciates, and it is not worthwhile to wait and to advertise a new
good after a while without paying the innovation cost. The same thing happens for the
discount factor. If the entrepreneur heavily discounts future returns, then there is no
reason to waste time. If the parameters are such that a
*
(s) is first increasing and then
decreasing, then the analysis changes slightly. The single-peaked feature of the long-
run stock of goodwill is reinforced and we may also have that A
ϱ
(s) has a minimum
and then a maximum.
Appendix
In this appendix, we present some technical results useful in the analysis and we
give proofs of some of the propositions.
We begin by recalling some basic mathematical definitions and results that
we used throughout the paper. We refer the reader to, for example, Brezis [3].
Given s ∈(0, +
ϱ
], we will denote by L
2
(0, s ) or, when no confusion is possible,
simply by L
2
, the space of Lebesgue measurable functions f : (0, s ) → ޒ such that

0
s
| f (s)|
2
ds <
ϱ
. The scalar product in this space will be denoted by · , ·
L
2
. More-
over, we will denote by H
n
(0, s ) (or simply H
n
), n = 1, 2,…, the Sobolev space of
functions f ∈L
2
such that the nth distributional derivative of f still belongs to L
2
.
26 E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods
We denote by L
ϱ
(0, +
ϱ
; L
2
) (respectively, L
ϱ
(0, +
ϱ
; ޒ)) the space of all functions
f : (0, +
ϱ
) → L
2
(respectively, ޒ) that are bounded and measurable. Finally, we will
denote by C
0
([0, s ]) (respectively, C
p
0
([0, s ])) or simply by C
0
(respectively, , C
p
0
),
the space of all continuous (respectively, left continuous with right limit) functions
f : (0, s ) → ޒ, endowed with the usual norm. If s = +
ϱ
, then we include square
integrability of the function in the above definitions. Given f ∈L
2
, we will denote by
f
+
the positive part of f. For g ∈L
2
, B
g
denotes the multiplication operator by the
function g, i.e.

B
g
: L
2
a L
2
, [B
g
f ] (s) · g(s) f (s).
Finally, given a set O ʚ ޒ
n
, the symbol I
O
will denote the indicator function of O, i.e.
a function that is equal to 1 in O and 0 outside.
Proof of proposition 3. First we prove that a
*
given by (16) is the unique optimal
control for our problem. To this end, we observe that by rewriting the functional J, the
problem (P) reduces to maximizing the functional

J
0
(a) ·
0
+ ϱ


1
e
− ρ t
F
0
(a(t), γ )d t (23)
subject to (1). The functional J
0
(a) does not depend on the initial datum A
0
; moreover,
by the definition of the Hamiltonian H
0
given in (12), it is easy to check that

J
0
(a) ≤
0
+ ϱ


1
e
− ρt
H
0
(γ )d t ·
1
ρ
H
0
(γ ).
If we find an element a
*
∈ޒ × L
2
such that a ≥ 0 and (17) is satisfied, then the control
strategy a(t) = a
*
for every t ≥ 0 is optimal. Now we can consider the map G : ޒ × L
2
→ ޒ,

G(r, a) · λ(0)γ (0)r − β
0
r
2
+ 〈a, B
λ
γ − q〉
L
2
− 〈B
β
a(t ), a(t )〉
L
2
.
By construction, F(a) = G(a(0), a), G is strictly concave, weakly upper semicontinu-
ous and coercive, while the set {a ∈ޒ × L
2
, a ≥ 0} is closed and convex in L
2
. Then,
on this set, G has a unique maximum point given by
r · r
*
·
λ(0)γ (0)

0
, a(s) · a
*
(s) ·
[λ(s)γ (s) − q(s)]
+
2β(s)
and the value of the maximum is

max
r ∈ޒ
a ∈L
2
, a≥ 0
G(r, a) · H
0
(γ ) ·
λ
2
(0)γ
2
(0)

0
+
0
s


1
([λ(s)γ (s) − q(s)]
+
)
2
4β(s)
d s.
E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods 27
When the compatibility condition is satisfied, the control strategy a
*
is obviously
continuous. Vice versa, assume that the compatibility condition is not satisfied. Then
by considering a sequence of controls (a
n
)
n∈ގ
such that
a
n
(0) ·
λ(0)γ (0)

0
; a
n
(s) ·
1
2β(s)
[λ(s)γ (s) − q(s)]
+
, s ∈
1
n
, s



]
]
]
(it is enough to connect in a smooth way the points 0 and 1 n), we can see that we still
have

lim
n →+ ϱ
J
0
(a
n
) · sup
a ∈U
J
0
(a) ·
1
ρ
H
0
( R( ρ, A
*
)γ ).
So, if there exists an optimal control strategy a
*
(t, s), then it still has to satisfy the
“maximum principle” (17). But this implies that a
*
is given by (16) and so, since (18)
is not satisfied, it is not continuous with respect to s at s = 0. ٗ
Sketch of proof of theorem 4. For the first part, it is enough to verify that the costate
satisfies (19)–(20). Uniqueness of the solution of (19)–(20) follows by observing
that γ is the only solution p of the second equation of (19) that also satisfies (20).
The other claims easily follow by recalling that the semigroups T and T
*
given in
propositions 1 and 2 are characterized by an exponential decay rate.
Proof of proposition 6. Setting z(s) ·
def
A′(s), s ∈(0, s ], the following equation can
be obtained from (21):
′ z (s) + µz(s) · (λa
*
′ ) (s); z(0) · ′ A (0
+
). (24)
First, let A′(0
+
) ≤ 0. Let s
0
be a maximum point of z. If s
0
∈(0, s ), then we have
µz(s
0
) = (λa
*
)′(s
0
) ≤ 0. If s
0
= 0, then z(s
0
) = A′
ϱ
(0
+
) ≤ 0 and if s
0
= s < +
ϱ
, then
z ′(s
0
) ≥ 0, which implies µz(s
0
) ≤ (λa
*
)′(s
0
) ≤ 0 (if s = +
ϱ
, we use that lim
s →+
ϱ
A′
ϱ
(s)
= 0 and then the same argument). It follows that A′(s) = z(s) ≤ 0 for every s ∈(0, s ).
This gives the first part of the claim. For the second part, we recall that z(0) > 0 and
z(s ) ≤ 0 (use that lim
s →+
ϱ
A′
ϱ
(s) = 0 when s = +
ϱ
). This implies that there exists a
first point s
0
∈(0, s ] such that z(s
0
) = 0. This point cannot be s since in this case, we
would have A′
ϱ
≥ 0 on (0, s ] and, from (21), we would also have

A
ϱ
( s ) ·
λ(s )
µ
a
*
(s ) ≤ 0,
which is impossible. We finally prove that z(s) ≤ 0 for s > s
0
. By contradiction, there
exists a maximum point s
1
∈(0, s ) such that z(s
1
) > 0. But this is impossible by reason-
ing, as in the first part of the proof. ٗ
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