Autonomous and advertising-dependent 'word of mouth' under costly dynamic pricing

Fouad El Ouardighi, G. Feichtinger, D. Grass, R.F. Hartl, Peter M. Kort

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Autonomous 'word of mouth', as a channel of social influence that is out of firms' direct control, has acquired particular importance with the development of the Internet. Depending on whether a given product or service is a good or a bad deal, this can significantly contribute to commercial success or failure. Yet the existing dynamic models of sales in marketing still assume that the influence of word of mouth on sales is at best advertising-dependent. This omission can produce ineffective management and therefore misleading marketing policies. This paper seeks to bridge the gap by introducing a contagion sales model of a monopolist firm's product where sales are affected by advertising-dependent as well as autonomous word of mouth. We assume that the firm's attraction rate of new customers is determined by the degree at which the current sales price is advantageous or not compared with the current customers' reservation price. A primary goal of the paper is to determine the optimal sales price and advertising effort. We show that, despite costly price adjustments, the interactions between sales price, advertising-dependent and autonomous word of mouth can result in complex dynamic pricing policies involving history-dependence or limit cycling consisting of alternating attraction of new customers and attrition of current customers. (C) 2015 Elsevier B.V. All rights reserved.

Original languageEnglish
Pages (from-to)860-872
JournalEuropean Journal of Operational Research
Volume251
Issue number3
DOIs
Publication statusPublished - 16 Jun 2016

Keywords

  • Dynamic pricing
  • Advertising effort
  • Word of mouth
  • Marketing strategy

Cite this

El Ouardighi, Fouad ; Feichtinger, G. ; Grass, D. ; Hartl, R.F. ; Kort, Peter M. / Autonomous and advertising-dependent 'word of mouth' under costly dynamic pricing. In: European Journal of Operational Research. 2016 ; Vol. 251, No. 3. pp. 860-872.
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Autonomous and advertising-dependent 'word of mouth' under costly dynamic pricing. / El Ouardighi, Fouad; Feichtinger, G.; Grass, D.; Hartl, R.F.; Kort, Peter M.

In: European Journal of Operational Research, Vol. 251, No. 3, 16.06.2016, p. 860-872.

Research output: Contribution to journalArticleScientificpeer-review

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