Optimal advertising expenditure using adaptive dual control approach

Abstract

In this thesis, the optimal advertising policy is discussed for a firm that wishes to maximize it``s net discounted profit stream. The discrete market share equation is derived based on the Vidale-Wolfe Model. To derive the optimal advertising policy in deterministic model, the control is defined as a propotion of profits and the concept of the Proper Condition is introduced. Deterministic model is extended to stochastic case where the parameters are normally distributed and the market share equation has a Gaussian disturbance term. Adaptive Dual Control approach is applied to determine the optimal advertising expenditures in stochastic model, where the results of the deterministic model are used as the Nominal Control. A numerical example is given to illustrate the practical procedure.