A dynamic model of manufacturing quality’s effect on optimal advertising and pricing policies

This paper deals with the determination of optimal advertising and pricing policies when the influence of manufacturing quality on sales is considered. Research to date has focused on the effect of advertising and pricing independently on the sales rate of a product under a variety of product and market conditions. These studies have not considered the effect of product quality, an important component of competitive strategy. The authors develop a dynamic model to maximize discounted profits over a planning horizon, in which sales rate is dependent on price, advertising and product quality. Using standard methods of optimal control theory they characterize qualitatively the nature of optimal advertising, quality, and pricing policies under a variety of conditions.