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Research Article

Optimal Diffusion Management of Non-Durable New Products Using Stochastic Control Programs

Yoon, Manhui

Published: January 1998 · Vol. 27, No. 1 · pp. 263-285
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Abstract

This study aims to enhance the managerial usefulness of diffusion models by optimally controlling the diffusion growth of new non-durable products. Prior research in this area has presented optimal advertising strategies (Horsky & Mate, 1988; Horsky & Simon, 1983) and pricing strategies (Dolan & Jeuland, 1981; Kalish, 1983; Kalish & Sen, 1986; Horsky, 1990) for the diffusion process through analytical solutions, whereas this study attempted heuristic optimization based on numerical solutions. In formulating the control problem, a prior non-durable product diffusion model (Yoon, 1996) was reduced to an equation of motion to provide information about the diffusion system, and managerial information was supplied through 135 marketing strategy scenarios (5 pricing strategies × 9 advertising strategies × 3 control strategies). The stochastic control program DUAL Algorithm (Kendrick, 1980, 1981) was employed to derive the optimal marketing mix strategy. According to the numerical optimal solution of this study, in cases where word-of-mouth effects do not exert significant influence on the diffusion process, as with new non-durable products, an initial high-price strategy combined with an advertising strategy featuring heavy initial advertising that decreases sharply over time proved desirable. These numerical results were consistent with the analytical results of prior research.