Markov Models of Advertising and Pricing Decisions

S. Christian Albright and Wayne Winston
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S. Christian Albright: Indiana University, Bloomington, Indiana
Wayne Winston: Indiana University, Bloomington, Indiana

Operations Research, 1979, vol. 27, issue 4, 668-681

Abstract: This paper uses Markov decision analysis to study the properties of optimal advertising and pricing decisions in a dynamic, stochastic environment. We are primarily concerned with exhibiting and interpreting properties of the Markovian transition probabilities and one-period reward functions that imply that the optimal advertising levels and optimal prices always increase or always decrease as a function of the firm's market position. This is done in both non-competitive and competitive situations. In the former, total discounted reward for a single firm is the objective, whereas in the latter we use the concept of stochastic games to construct what is known as a discounted equilibrium point for two competing firms.

Date: 1979
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