Advertising and the Diffusion of New Products

This paper examines the effects of advertising on the sales growth of new, infrequently purchased products. It is assumed that producer originated advertising serves to inform innovators of the existence and value of the new product while word-of-mouth communication by previous adopters affects imitators. Such a diffusion process is modeled and tested for the case of telephonic banking. It is shown that advertising accelerates the diffusion process of the new product. The implications for a firm introducing a new product and wishing to maximize its discounted profits over the product's life cycle are discussed. In particular, it is demonstrated that the optimal advertising policy is to advertise heavily when the product is introduced and to reduce the level of advertising as sales increase and the product moves through its life cycle. Evidence that such a strategy is commonly practiced by firms is cited.

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