Optimal Advertising and Product Durability Decisions in New Product Diffusion

Speaker:  Chi Chung Siu

Affiliation: The Hang Seng University of Hong Kong

Abstract

This talk examines how a manufacturer should optimally manage advertising across a product’s lifecycle for a semi-durable good whose failure rate is determined by design choices. We model product adoption by capturing three consumer groups: innovators who discover the product directly, consumers who enter the market via advertising, and loyal customers who repurchase as replacements. The firm’s revenue therefore reflects multiple streams—sales of new products, maintenance fees, and replacement purchases.

Using an integrated diffusion-and-lifecycle framework that blends durable and non-durable characteristics, the talk derives advertising policies via optimal control, producing clear and implementable guidelines for advertising during the initial diffusion phase. We then connect optimal advertising and optimal design by showing how different failure-rate choices can affect total profit, including cases where intentionally higher failure rates can be optimal. Finally, we extend the analysis to a competitive, game-theoretic setting with multiple manufacturers, demonstrating that the resulting advertising strategies remain tractable even under strategic competition.

Biography: Chi Chung Siu an Associate Professor in the Department of Mathematics, Statistics, and Insurance at Hang Seng University of Hong Kong (HSUHK). Before joining HSUHK, he held postdoctoral research fellowships at the University of Technology, Sydney and the University of Wollongong. His research interests encompass financial economics, actuarial mathematics, operations research, stochastic differential games, and supply chain management. His works appear in top-tier journals, such as Operations Research, Production and Operations Management, Automatica, Insurance: Mathematics and Economics, SIAM Journal on Control and Optimization, and Journal of Economic Dynamics and Control.