Optimal Advertising Budgeting for Market Share Models

This paper develops rules for setting advertising budgets when long term effects of advertising and competitive promotional spending are considered in a market share model. In both deterministic and probabilistic cases, the firm’s optimal advertising budget is shown to be insensitive to the level of competitive advertising. The key determinant of the advertising level is long run expected profit - the budgeting rule developed is to spend a constant percentage of long run profit on advertising. Reasons for this result are explored.