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You are on page 1of 15

**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)

2β

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)

2β

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

4β

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)

2β

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)

2β

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)

2β

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)

4β

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)

2β

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. ٗ

References

[1] E. Barucci and F. Gozzi, On investments in a vintage capital model, Research in Economics 52

(1998)159–188.

28 E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods

[2] A. Bensoussan, G. Da Prato, M. Delfour and S. Mitter, Representation and Control of Infinite

Dimensional Systems, Birkhäuser, Boston, 1992.

[3] H. Brezis, Lécons d’Analyse Fonctionnelle, Masson, Paris, 1983.

[4] P. Cannarsa and M. Tessitore, Optimality conditions for boundary control problems of parabolic

type, in: Proceedings of the International Conference on Distributed Control System: Nonlinear

Problems, Birkhäuser, Basel, 1994.

[5] H. Fattorini, Boundary control system, SIAM Journal of Control 6(1968)349–385.

[6] W. Fleming and H. Soner, Controlled Markov Processes and Viscosity Solutions, Springer, New

York, 1993.

[7] J. Gould, Diffusion processes and optimal advertising policy, in: Microeconomic Foudations of

Employment and Inflation Theory, Norton, New York, 1970, pp. 338–368.

[8] F. Gozzi and M. Tessitore, Optimality conditions for dirichlet boundary control problems of parabolic

type, Journal of Mathematical Systems, Estimation and Control 8(1)(1998).

[9] S. Jorgensen, A survey of some differential games in advertising, Journal of Economic Dynamics

and Control 4(1982)341–369.

[10] I. Lasiecka and R. Triggiani, Differential and algebraic equations with application to boundary

control problems: Continuous theory and approximation theory, in: Lecture Notes in Control and

Information Sciences, vol. 164, Springer, 1991.

[11] R. Nagel and E. Sinestrari, Inhomogeneous volterra integrodifferential equations for Hille–Yosida

operators, in: Functional Analysis, eds. K.D. Bierstedt and R.V. Pietsch, Marcel Dekker, 1994, pp.

51–70.

[12] M. Nerlove and K. Arrow, Optimal advertising policy under dynamic conditions, Economica 29

(1962)124–142.

[13] A. Pazy, Semigroups of Linear Operators and Applications to Partial Differential Equations,

Springer, New York Heidelberg Berlin, 1983.

E. Barucci, F. Gozzi ͞ Optimal advertising with a continuum of goods 29

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