An investigation of the interaction of advertising, pricing and quality on sales response

Much information about product quality diffuses into the market place via consumer to consumer communication and other mechanisms that are not directly connection to predetermined corporate promotional policies. This fact raises questions about how the information that has diffused into the market interacts with active corporate policies attempting to communicate information to consumers. It also creates questions about how a company might use the quality aspects of its products to take advantage of this diffusion process to maximize its profitability. The NGM model was developed by Narasimhan, Ghosh and Mendez (1993) to examine this question by considering how improving a product's quality profile might impact the total profits a company might realize over the life of a durable good. The NGM model did this by using the product price as an optimal control variable and using quality as a factor impacting purchasing as quality weighted goods diffuse into the marketplace. This dissertation will extend the NGM model in three ways.; First, the original NGM model has no explicit competition for market share. In the NGM model competition is implicit. The current work explicitly incorporates a second product as competition to the first product in the marketplace. Second, the current work disaggregates quality into two factors and examines how quality affects sales in two ways. The original NGM model examines quality as a single factor. In this work quality is considered both in terms of improvements generated by a continuous quality improvement mechanism and quality improvements made via a discontinuous mechanism, e.g. designed product improvements such as new features. The third extension to the NGM model is to explicitly incorporate the effect an advertising policy has on sales as well the impact that policy has on information diffusion.; Practitioners are expected to be able to use the results from this dissertation to assess policy decisions in two ways. First, they can compare and contrast their quality strategy with existing competition in their market segment. They can also consider how a new entrant into their market might impact their existing quality strategy. Second, they can consider different levels of advertising expenditures within the context of quality information diffusion. This information should suggest the best time periods to implement planned model changes and a potentially more efficient use of advertising expenditures.