On dynamic policies for quality, price and advertising

Abstract

This study presents a novel algorithm to derive the long term policies of quality level, price, and advertisement for a new product. The diffusion model of marketing is also combined with the experience curve phenomenon of cost to formulate a profit function capable of discounting future profit streams. To maximize the profits, the optimal conditions of the profit function are initially derived by the optimal control theory and then, the genetic algorithm is implemented to search for the approximation solutions of quality level, price, and advertising expenditure at each period on the planning horizon (life cycle). In addition, an illustrative example is presented to describe the results obtained herein. Those results are used to perform the sensitivity analysis for the major parameters to specify their effects on profits. Results in this study allow us to achieve the following: (a) simultaneously solve the quality, price, and advertising policy so that explicit solutions can be obtained for firms, (b) propose a more appropriate dynamic model to demonstrate the evolutionary forces in a commercial environment, and (c) enhance the long term profit performance via the polices proposed herein, i.e., the approximation of the best solution.