Too Popular, Too Fast: Optimal Advertising and Entry Timing in Markets with Peer Influence

Abstract

We study optimal advertising and entry timing decisions for a new product being sold in two-segment markets in which followers are positively influenced by elites, whereas elites are either unaffected or repulsed by product popularity among followers. Key decisions in such markets are not only how much to advertise in each segment over time but also when to enter the follower segment. We develop a continuous-time optimal control model to examine these issues. Analysis yields two sets of two-point boundary value problems where one set has an unknown boundary value condition that satisfies an algebraic equation. A fast solution methodology is proposed. Two main insights emerge. First, the optimal advertising strategy can be U-shaped, that is, decreasing at first to free-ride peer influence but increasing later on to thwart the repulsion influence of overpopularity causing disadoption. Second, in markets where cross-segment repulsion triggers disadoption, advertising is only moderately effective, and entry costs are high, managing both advertising and entry timing can result in significantly higher profits than managing only one of these levers. In markets without disadoption, with high advertising effectiveness or with low entry costs, in contrast, delaying entry may add little value if one already manages advertising optimally. This implies that purveyors of prestige or cool products need not deny followers access to their products in order to protect their profits, and can use advertising to speed up the democratization of consumption profitably. This paper was accepted by Juanjuan Zhang, marketing.