The Cost of Myopia with Respect to a Switching Time in an Advertising Model

Alessandra Buratto (), Luca Grosset, Maddalena Muttoni and Bruno Viscolani
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Alessandra Buratto: University of Padova
Luca Grosset: University of Padova
Maddalena Muttoni: University of Padova
Bruno Viscolani: University of Padova

Chapter Chapter 7 in The Unaffordable Price of Static Decision-making Models, 2025, pp 95-118 from Springer

Abstract: Abstract The ability to react to abrupt changes constitutes a fundamental skill for decision makers, especially in dynamic contexts where problem structures can change over time. However, there are situations in which planners are myopic, i.e., unaware of the impending changeover. The latter context inevitably results in a loss of profit. This paper aims to assess the cost of adopting a myopic approach toward system changes. We consider a marketing problem modeled à la Nerlove and Arrow, where the demand for a product is influenced by the goodwill of the firm that produces, advertises, and sells it. Moreover, we assume that production costs may change abruptly with a hazard rate that depends on the demand for the product. To address this situation, we formulate and solve an optimal control problem with stochastic switching time. We compare the optimal profit of a planner who is aware of the possibility of a switch to the one of a planner who is myopic with respect to such an event.

Keywords: Optimal control; Stochastic switching; Myopic decision-making; Dynamic advertising model; Abrupt system changes (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isochp:978-3-031-88638-6_7

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DOI: 10.1007/978-3-031-88638-6_7

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