Stock Of Goodwill Research Articles

Market share, advertising, R&D, and profitability: An empirical analysis of leading industrial firms in Japan

This paper develops a dynamic model of a leader firm which chooses the time paths of R&D and advertising inputs so as to maximize the present value of expected profits. From this theoretical model simultaneous-equations system for market share, advertising, R&D, and profitability is derived and estimated using the data on the leading industrial firms in Japan. Our results show that, as far as top firms are concerned, market share and demand growth have significant positive effects on profitability, and an increase in the stock of goodwill increases market share as well as profitability.

An alternative approach to explaining political popularity

Previous empirical work on the relationship between political popularity and economic events has either not attempted to model the alternative policies of the different parties, or has modelled them in a rather simplistic manner. It has also typically assumed that voters are backward-looking in contrast to recent work on expectations theory. An approach is outlined which is based on a forward-looking comparison of the parties and incorporates the effect of news. An alternative derivation relying on the evaluation of the stock of goodwill built up for each party is also suggested. Empirical evidence from the Gallup opinion poll provides some support for these hypotheses.

Goodwill and Market Shares in Oligopoly

Economic literature treats price as the traditional competition variable. However, Schmalensee (1976, p. 493) argued that prices change infrequently, and that firms compete mainly through non-price variables. The most important non-price competition variables are advertising and product variation. Although there are many works dealing with non-price competition, they have not devoted much attention to the multi-period effect of these variables and the models have been mainly static, or a sequence of static models. (Further discussion of this argument can be found in Kydland (1977), in which dynamic dominant player models are discussed.) In an earlier paper, Arrow and Nerlove (1962) pointed out that advertising expenditure should be. treated in the same way as investment in a durable good. They assumed that there is a stock of goodwill that determines the current demand. This stock of goodwill summarizes the advertising in the past and, like capital stock, depreciates over time. Arrow and Nerlove analysed the optimal advertising strategy for the monopolistic firm. In this paper we extend the Arrow-Nerlove model to oligopolistic competition, in which the firms compete among themselves via goodwill. The game we describe takes place over time and discounted profit is used as a criterion. The current advertising of any player affects future demand, and therefore the model has an intertemporal dependence structure. Extending an assumption by Schmalensee (1978), in Section I we allow market shares to depend on the firm's goodwill and not merely on current advertising. Using this definition of market share, we discuss in Section II the optimal advertising policy for a single firm. In Section III we prove the existence of a unique stationary equilibrium point for oligopolistic competition. Since we allow firms to have different cost functions, the equilibrium point is not a symmetric one; i.e. different firms have different market shares and different goodwill at the equilibrium point. In Section IV we discuss this asymmetric solution by explaining the relation between production cost and market shares. The impact of the number of firms on the advertising expenditure is discussed in Section V. We prove that the firms' advertising expenses tend to decline as the number of firms increases. However, if one of the firms is a leading firm in the industry and has a market share above one-half, we show that this firm might increase its advertising as other firms enter into the industry. As an example, we discuss in Section VI the duopoly case and offer an explicit statement of the market shares at the equilibrium point. In Section VII we analyse an industry consisting of identical firms, and explore the influence of the interest rate and the depreciation rate on the firms' goodwill and advertising policy.

Optimal control of non‐linear advertising models with replenishable budget

AbstractThis paper deals with an optimal advertising model with two state variables. The revenue and efficiency functions are concave. The aim is to choose the rate of advertising expenditures over time in a way that maximizes the present value of net profit streams over an infinite horizon subject to a replenishable budget. It is shown that the optimal advertising expenditures start at a high level and decrease over time if the initial stock of goodwill is low. Low initial budget as well as low initial stock of goodwill can cause shortness of budget. It turns out that, in contrast to comparable linear models, the remaining budget is always positive.

Profit Rates and Market Shares of Leading Industrial Firms in Japan

THE relationship of the top firm's profit rate to its market share, its stock of goodwill and other elements of the market structure was investigated using data on Japanese industrial firms. Traditional microeconomic theory suggests that firms in oligopolistic industries restrict output, raise prices and earn higher profits than do firms in competitive industries, and therefore there will be an important misallocation of resources. To test the validity of this hypothesis there have been a rather large number of studies, beginning with a study by Bain [i], which investigated the relationship between profitability and market structure. Most of these quantitative tests of the structure-performance relationship have been based on data from the United States. Thus, it is of particular interest to see whether similar conclusions concerning the structure-performance relationship can be reached in a fast-growing economy such as that of Japan. This is one justification for adding to the already voluminous literature on this subject. The second justification for our work is that we have collected data only for top firms-firms whose sales are the largest in their respective industriesand have investigated the relationship of each top firm's profit rate to its market share, its stock of goodwill and other elements of the market structure, which has not been examined previously and which is of some interest. It should be emphasized that the behaviours of non-top firms are likely to differ from that of a top firm, i.e. top firms often behave as leaders, while the remaining firms tend to behave as followers.1 Therefore, in order to improve the fitness of the structure-performance model, we restrict the sample to top firms. The third justification for our work is the use of the concept of the stock of goodwill, instead of the advertising/sales ratio. Previous empirical studies have consistently found a strong positive relationship between profit rates and advertising/sales ratios. The advertising/sales ratio has been generally believed to work as a proxy for the height of the product differentiation barrier to entry. Because there is no strong theoretical justification for using the advertising/sales ratio as an independent variable, empirical results based

Optimal dynamic advertising policies in the presence of continuously distributed time lags

The Nerlove-Arrow model of optimal dynamic advertising policies is generalized by incorporating a continuously distributed lag between advertising expenditures and increases in the stock of goodwill. This leads to a control problem where the equation of motion is given by an integro-differential equation. The transitory and steady-state properties of the optimal policies are examined, both for a general lag function and for a gamma distributed lag. The dependence of the steady-state solution on the parameters of the gamma distribution is also investigated. An example is given using specific demand and cost functions.

Linear Programming Models for Production-Advertising Decisions

This paper studies the problem of simultaneously smoothing production and inventory and setting advertising levels. The models given are linear programming models, assuming a deterministic demand-advertising-price relationship. The formulations include both one period and multiperiod models. Advertising has a decreasing effect within each period with a saturation level of advertising included and advertising also has a decreasing effect through time, allowing a build up of a stock of goodwill. A decomposition approach is given which is very efficient computationally due to the simplicity of the subproblems. Other computational aids are discussed; the pricing problem is examined briefly; and a numerical example is given to indicate the possible effect of considering production and advertising (and pricing) decisions together.