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The Dynamic Persuasive and Informative Advertising Strategy of a Two-Part Tariff Monopolist with Advertising Spillover Effects

30 Pages Posted: 7 Aug 2021 Publication Status: Submitted

See all articles by Lingyun Zhou

Lingyun Zhou

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Hanzhi Liu

Shanghai Jiao Tong University (SJTU) - College of Electronic Information and Electrical Engineering

genyuan zhong

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Abstract

Though the two-part tariff is a widely adopted pricing strategy, research on it is lacking. In this paper, we establish a model of a two-part tariff product with persuasive advertising, informative advertising, and process innovation using optimal control theory. We apply Taylor’s theorem to analyze the properties of the nonlinear dynamic system and the shooting method to solve the numerical problem. We find that the pricing strategy is consistent with a two-part tariff in the static state, with price affected only by process innovation. The relationship between the two types of advertisements is affected by the advertising spillover effect, which represents the similarity of the roles of the two types of advertisements. The more similar the roles of the advertisements are, the more likely they are to be supplemented. Meanwhile, the advertising spillover effect also indicates the quality of an advertisement. The firm with the higher advertising spillover effect is more likely to attract consumers, reducing marginal costs. Therefore, a firm should either diversify its advertisements or invest only in the one with the highest advertising spillover effect. The shooting method converges well and the numerical solution indicates that our model has a unique saddle point equilibrium.

Keywords: decision analysis; quality control; two-part tariff; advertising spillover effects; process innovation

JEL Classification: L1, O3

Suggested Citation

Zhou, Lingyun and Liu, Hanzhi and zhong, genyuan, The Dynamic Persuasive and Informative Advertising Strategy of a Two-Part Tariff Monopolist with Advertising Spillover Effects. Available at SSRN: https://ssrn.com/abstract=3900943 or http://dx.doi.org/10.2139/ssrn.3900943

Lingyun Zhou

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

Hanzhi Liu

Shanghai Jiao Tong University (SJTU) - College of Electronic Information and Electrical Engineering ( email )

Shanghai
China

Genyuan Zhong (Contact Author)

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

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