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In this paper, we extend the well-known Nerlove-Arrow dynamic model by adding both price and advertising, and study the dynamic optimal strategic pricing and advertising decisions of a monopolist, and obtain the following three main findings. First, a product's price higher than the myopic price on considering the price and advertising effects on goodwill. This result is consistent with the product differentiation policy that facilitates higher prices. Second, the ratio of goodwill to profit is directly proportional to the goodwill elasticity and inversely proportional to the sum of the marginal opportunity cost of investment. Third, if demand increases by more than the value of the new goodwill, then the firm should make profits through pricing and advertising based on cost considerations only. On the other hand, if the value of the new goodwill increases by more than the demand, then the firm should make profits from the goodwill improvements by advertising with a high goodwill.
Date of Conference: 20-22 Aug. 2007