Optimal Advertising When Envisioning a Product-Harm Crisis
Marketing Science, Forthcoming
Posted: 19 Jul 2011
Date Written: July 18, 2011
How should forward-looking managers plan advertising if they envision a product-harm crisis in the future? To address this question, we propose a dynamic model of brand advertising in which, at each instant, a non-zero probability exists for the occurrence of a crisis event, which damages the brand’s baseline sales and may enhance or erode marketing effectiveness when the crisis occurs. Because managers don’t know when the crisis will occur, its random time of occurrence induces a stochastic control problem, which we solve analytically in closed-form. More importantly, the envisioning of a possible crisis alters managers’ rate of time preference: anticipation enhances impatience. That is, forward-looking managers discount the present ⎯ even when the crisis has not occurred ⎯ more than they would in the absence of crisis. Building on this insight, we then derive the optimal feedback advertising strategies and assess the effects of crisis likelihood and damage rate. We discover the crossover interaction: the optimal pre-crisis advertising decreases, but the post-crisis advertising increases as the crisis likelihood (or damage rate) increases. In addition, we develop a new continuous-time estimation method to estimate sales dynamics and feedback strategies simultaneously using discrete-time data. Applying it to market data from the Ford Explorer’s rollover recall, we furnish evidence to support the proposed model. We detect compensatory effects in parametric shift: ad effectiveness increases, but carryover effect decreases (or vice versa). We also characterize the crisis occurrence distribution that shows Ford Explorer should anticipate a crisis in 2.1 years and within 6.3 years at the 95% confidence level. Finally, we find a remarkable correspondence between the observed and optimal advertising decisions.
Keywords: Product Harm Crisis, Optimal Advertising, Stochastic Optimal Control, Random Stopping Time Problem, Kalman Filter, Ford Explorer Rollover
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