A note on budget allocation for market research and advertising

Firms that introduce new products often conduct market research to reduce the substantial uncertainty in demand. When a fixed budget is assigned to marketing‐oriented activity, investments in market research must be balanced against other advertising expenses. We characterize a firm's optimal marketing and production decisions for a new product. The larger a firm's production cost, the higher is the cost associated with unsold products. Market research increases the forecast accuracy and thus reduces the risk of overage. As a consequence, one might expect that a firm's investment in market research should be higher if it faces higher production costs. Interestingly we find that an increase in the production cost may sometimes lead to a decrease in the optimal investment in market research, even when the marketing budget is not restrictive.