Allocating Spending Between Advertising and Information Technology in Electronic Retailing

Yong Tan () and Vijay S. Mookerjee ()
Additional contact information
Yong Tan: University of Washington Business School, Seattle, Washington 98195-3200
Vijay S. Mookerjee: School of Management, University of Texas at Dallas, Richardson, Texas 75803-0688

Management Science, 2005, vol. 51, issue 8, 1236-1249

Abstract: This study examines coordination issues that occur in allocating spending between advertising and information technology (IT) in electronic retailing. Electronic retailers run the risk of overspending on advertising to attract customers but underspending on IT, thus resulting in inadequate processing capacity at the firm's website. In this paper, we present a centralized, joint marketing-IT model to optimally allocate spending between advertising and IT, and we discuss an uncoordinated case where marketing and IT make suboptimal advertising and capacity decisions. We show how these decisions can be coordinated either by reducing the value of a customer session or by designing an optimal processing contract between marketing and IT. Both the coordination methods can be implemented with only local knowledge of the IT function, yet they generate a solution that almost matches the quality of the centralized solution. We extend our basic model to consider demand uncertainty, lagged advertising effects, and uncertainties in the lead time to acquire IT capacity. With demand uncertainty, electronic retailers should reduce spending on advertising and increase IT capacity if there is potential for a demand upswing and the cost of IT capacity is relatively low. The value of a customer session should be further reduced when uncertainties exist. This is required to share the risk of excess or inadequate IT capacity.

Keywords: coordination schemes; capacity planning; demand generation; electronic retailing (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1050.0424 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:51:y:2005:i:8:p:1236-1249

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().