Three essays in the economics of marketing

Kin-nam Lau, Purdue University

Abstract

Essay one deals with the problem of designing an optimal sales policy for a firm in a competitive, uncertain selling environment. Two aspects of a firm's sales policy are modeled, namely the sales compensation plan and extent of discounting from the list price. A two-stage game-theoretic approach is used to determine optimal levels of these two control variables given competitive sales compensation and price discounting policies. In Stage I, the optimum level of sales effort expected from utility maximizing salespersons is determined given sales compensation policies of competing firms. Then, in Stage II, the optimal sales policies of the competing firms is derived given the optimal level of sales effort determined in Stage I. Essay two deals with the optimal advertising and pricing policies, while recognizing explicitly both the competitive and dynamic nature of markets. The analysis is performed within the framework of the Nerlove and Arrow (1962) model which represents advertising as an investment in goodwill. A differential game with a symmetric profit function across the two competitors in the market is used to determine the optimal duopolistic advertising expenditures and pricing policies. Two cases are included. The pure advertising model includes advertising as the only marketing instrument. The general model allows for substitutability between advertising and pricing in formulating a marketing program. In essay three, the principal agent theory is combined with the sample information to solve a spectrum of sales compensation problems, namely, the parameter's estimation when the sales effort levels are not observable, the design of a self-revealing contract, the design of a non-linear contract and the design of a linear contract with and without market segmentation, with and without prize motivation, with and without competition.

Degree

Ph.D.

Advisors

Kalwani, Purdue University.

Subject Area

Marketing

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