Advertising and Advertising Claims Over Time

Abstract

Advertising budget allocation with carryover effects over time is a problem that was treated extensively by economists. Additional developments were carried out by Sethi who has also provided some outstanding review papers. The model treated by Sethi were essentially defined in terms of optimal control problems using deterministic advertising models while my own were essentially sales response stochastic models with advertising budget determined by stochastic control problems. These problems continue to be of academic and practical interest. Issues relating to the “advertising message” such as truthful claims advertising directed to first time buyers has not attracted much attention however.

The purpose of this paper is to address issues relating to advertising and their messages by suggesting a stochastic advertising-repeat purchase model. In this model, advertising directed to first time buyers is essentially defined by two factors: the advertising budget and the advertising message (such as statement regarding the characteristics of a product, its lifetime etc.). Consumers experience in case they buy the product will define the advertising message “reliability”, namely that the probability that advertised message are confirmed or not. Repeat purchasers, however, are influenced by two factors, on the one hand the advertising messages that are directed to experienced consumers and of course the effects of their own experience (where past advertising claims whether truthful, or not, interact with customers’ personal experience). Advertising claims that underestimate products characteristics might be “reliable” but then they might not entice first time purchasers, while overly optimistic advertising messages might entice first time purchasers but be perceived as unreliable by repeat purchasers who might switch to other competing brands. In this sense, the decision to advertise is necessarily appended by the decision to “what to advertise”, which may turn out to be far more important for a firm. This paper provides a theoretical approach to deal with this issue.