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Advertising and the Diffusion of New Products

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Author Info

  • Dan Horsky

    (Graduate School of Management, University of Rochester, Rochester, New York 14627)

  • Leonard S. Simon

    (Executive Vice-President, Community Savings Bank, Rochester, New York 14604)

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    Abstract

    This paper examines the effects of advertising on the sales growth of new, infrequently purchased products. It is assumed that producer originated advertising serves to inform innovators of the existence and value of the new product while word-of-mouth communication by previous adopters affects imitators. Such a diffusion process is modeled and tested for the case of telephonic banking. It is shown that advertising accelerates the diffusion process of the new product. The implications for a firm introducing a new product and wishing to maximize its discounted profits over the product's life cycle are discussed. In particular, it is demonstrated that the optimal advertising policy is to advertise heavily when the product is introduced and to reduce the level of advertising as sales increase and the product moves through its life cycle. Evidence that such a strategy is commonly practiced by firms is cited.

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    File URL: http://dx.doi.org/10.1287/mksc.2.1.1
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 2 (1983)
    Issue (Month): 1 ()
    Pages: 1-17

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    Handle: RePEc:inm:ormksc:v:2:y:1983:i:1:p:1-17

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    Related research

    Keywords: diffusion of innovations; new products; optimal advertising;

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    Cited by:
    1. Alexander Frenzel Baudisch & Hariolf Grupp, 2006. "Evaluating the market potential of innovations: A structured survey of diffusion models," Jenaer Schriften zur Wirtschaftswissenschaft 21/2006, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät.
    2. Martin Hewing, 2012. "A Theoretical and Empirical Comparison of Innovation Diffusion Models Applying Data from the Software Industry," Journal of the Knowledge Economy, Springer, vol. 3(2), pages 125-141, June.
    3. Mesak, Hani I. & Bari, Abdullahel & Babin, Barry J. & Birou, Laura M. & Jurkus, Anthony, 2011. "Optimum advertising policy over time for subscriber service innovations in the presence of service cost learning and customers' disadoption," European Journal of Operational Research, Elsevier, vol. 211(3), pages 642-649, June.
    4. Jørgensen, Steffen & Kort, Peter M. & Zaccour, Georges, 2009. "Optimal pricing and advertising policies for an entertainment event," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 583-596, March.
    5. Parker, Philip M. & Sarvary, Miklos, 1997. "Formulating dynamic strategies using decision calculus," European Journal of Operational Research, Elsevier, vol. 98(3), pages 542-554, May.
    6. Meade, Nigel & Islam, Towhidul, 2006. "Modelling and forecasting the diffusion of innovation - A 25-year review," International Journal of Forecasting, Elsevier, vol. 22(3), pages 519-545.
    7. Cantamessa, Marco & Valentini, Carlo, 2000. "Planning and managing manufacturing capacity when demand is subject to diffusion effects," International Journal of Production Economics, Elsevier, vol. 66(3), pages 227-240, July.
    8. Teng, Jinn-Tsair & Thompson, Gerald L., 1996. "Optimal strategies for general price-quality decision models of new products with learning production costs," European Journal of Operational Research, Elsevier, vol. 93(3), pages 476-489, September.
    9. Fung, Michael K. & Cheng, Arnold C. S., 2004. "Diffusion of off-balance-sheet financial innovations: Information complementarity and market competition," Pacific-Basin Finance Journal, Elsevier, vol. 12(5), pages 525-540, November.
    10. Marc Fischer & Peter Leeflang & Peter Verhoef, 2010. "Drivers of peak sales for pharmaceutical brands," Quantitative Marketing and Economics, Springer, vol. 8(4), pages 429-460, December.
    11. Urban, Glen L. & Roberts, John H. & Hauser, John R., 1986. "Prelaunch forecasting of new automobiles : models and implementation," Working papers 1820-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    12. Neuberger, Doris, 1997. "Direct Banking - A Demand Pull and Technology Push Innovation," Thuenen-Series of Applied Economic Theory 05, University of Rostock, Institute of Economics.
    13. Ouardighi, Fouad El & Tapiero, Charles S., 1998. "Quality and the diffusion of innovations," European Journal of Operational Research, Elsevier, vol. 106(1), pages 31-38, April.
    14. Hsiao, James Po-Hsun & Jaw, Chyi & Huan, Tzung-Cheng, 2009. "Information diffusion and new product consumption: A bass model application to tourism facility management," Journal of Business Research, Elsevier, vol. 62(7), pages 690-697, July.
    15. Theoharakis, Vasilis & Vakratsas, Demetrios & Wong, Veronica, 2007. "Market-level information and the diffusion of competing technologies: An exploratory analysis of the LAN industry," Research Policy, Elsevier, vol. 36(5), pages 742-757, June.
    16. Liu, John, 2000. "On the dynamics of stochastic diffusion of manufacturing technology," European Journal of Operational Research, Elsevier, vol. 124(3), pages 601-614, August.

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