EMPIRICAL-ANALYSIS OF OPTIMAL ADVERTISING POLICY

A model of market share response to advertising is formulated as a first-order Markov process, with nonstationary transition probabilities. The model as specified is nonlinear in its parameters, and nonlinear regression techniques are applied to estimate them. It is shown that this nonlinear form offers, via likelihood ratio tests, a unique opportunity for testing the model, and in a resulting empirical test, the model is found to be consistent with the data. Given these empirical findings, an optimal advertising policy is derived by the use of optimal control theory.