PRODUCT INNOVATION, PROCESS INNOVATION AND ADVERTISING-BASED GOODWILL: A DYNAMIC ANALYSIS IN A MONOPOLY

Abstract

In this paper, we develop a dynamic control model to investigate a monopolist’s investment strategies in product innovation, process innovation and advertising-based goodwill. The significant features of our study are: (i) considering the effect of product quality on goodwill; (ii) considering the instantaneous cost of producing a quality using machinery and/or skilled labour; (iii) the customers’ demand function depends on product quality, product price and goodwill in a separable multiplicative way between the state variables and control variables. Our results suggest that (i) the system admits unique saddlepoint steady-state equilibrium under the monopolist optimum and the social optimum; (ii) and the monopolist will have an underinvestment problem as compared with the social planner; and (iii) although the product price is still determined by the monopolist under the social planner optimum, the product price is higher under the monopolist optimum than that under the social planner optimum