Optimal advertising and promotion budgets in dynamic markets with brand equity as a mediating variable

We study the optimal levels of advertising and promotion budgets in dynamic markets with brand equity as a mediating variable. To this end, we develop and estimate a state-space model based on the Kalman filter that captures the dynamics of brand equity as influenced by its drivers, such as the brand’s advertising and sales promotion expenditures. By integrating the Kalman filter with the random coefficients logit demand model, our estimation allows us to capture the dynamics of brand equity as well as to model consumer heterogeneity using store-level data. Using these demand model estimates, we determine the Markov perfect equilibrium advertising and promotion strategies. Our empirical analysis is based on store-level scanner data in the orange juice category, which comprises two major brands – Tropicana and Minute Maid.