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Optimal risk in marketing resource allocation

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  • Vidal-Sanz, Jose M.
  • Balbás, Alejandro
  • Esteban-Bravo, Mercedes

Abstract

Marketing resource allocation is increasingly based on the optimization of expected returns on investment. If the investment is implemented in a large number of repetitive and relatively independent simple decisions, it is an acceptable method, but risk must be considered otherwise. The Markowitz classical mean-deviation approach to value marketing activities is of limited use when the probability distributions of the returns are asymmetric (a common case in marketing). In this paper we consider a unifying treatment for optimal marketing resource allocation and valuation of marketing investments in risky markets where returns can be asymmetric, using coherent risk measures recently developed in finance. We propose a set of first order conditions for the solution, and present a numerical algorithm for the computation of the optimal plan. We use this approach to design optimal advertisement investments in sales response management

Suggested Citation

  • Vidal-Sanz, Jose M. & Balbás, Alejandro & Esteban-Bravo, Mercedes, 2009. "Optimal risk in marketing resource allocation," DEE - Working Papers. Business Economics. WB wb090868, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    • Handle: RePEc:cte:wbrepe:wb090868
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    References listed on IDEAS

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    1. Leeflang, P.S.H. & Wittink, Dick R., 2000. "Building models for marketing decisions: past, present and future," Research Report 00F20, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    2. repec:dgr:rugsom:00f20 is not listed on IDEAS
    3. Martin Natter & Thomas Reutterer & Andreas Mild & Alfred Taudes, 2007. "—An Assortmentwide Decision-Support System for Dynamic Pricing and Promotion Planning in DIY Retailing," Marketing Science, INFORMS, vol. 26(4), pages 576-583, 07-08.
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