Optimal Advertising When Envisioning a Product-Harm Crisis
Marketing Science, 2011
How should forward-looking managers plan advertising if they envision a product-harm crisis in the future? To address this question, Professor Olivier Rubel, Professor Prasad Naik and Professor Shuba Srinivasan propose a dynamic model of brand advertising in which, at each instant, a nonzero probability exists for the occurrence of a crisis event that damages the brand’s baseline sales and may enhance or erode marketing effectiveness when the crisis occurs. Because managers do not know when the crisis will occur, its random time of occurrence induces a stochastic control problem, which they solve analytically in closed form. More importantly, the envisioning of a possible crisis alters managers’ rate of time preference: anticipation enhances impatience.
That is, forward-looking managers discount the present—even when the crisis has not occurred—more than they would in the absence of crisis. Building on this insight, we then derive the optimal feedback advertising strategies and assess the effects of crisis likelihood and damage rate. They discover the crossover interaction: the optimal precrisis advertising decreases, but the postcrisis advertising increases as the crisis likelihood (or damage rate) increases.