An application of approximate dynamic programming in multi-period multi-product advertising budgeting

Abstract

<p style='text-indent:20px;'>Advertising has always been considered a key part of marketing strategy and played a prominent role in the success or failure of products. This paper investigates a multi-product and multi-period advertising budget allocation, determining the amount of advertising budget for each product through the time horizon. Imperative factors including life cycle stage, <inline-formula><tex-math id="M1">\begin{document}$ BCG $\end{document}</tex-math></inline-formula> matrix class, competitors' reactions, and budget constraints affect the joint chain of decisions for all products to maximize the total profits. To do so, we define a stochastic sequential resource allocation problem and use an approximate dynamic programming (<inline-formula><tex-math id="M2">\begin{document}$ ADP $\end{document}</tex-math></inline-formula>) algorithm to alleviate the huge size of the problem and multi-dimensional uncertainties of the environment. These uncertainties are the reactions of competitors based on the current status of the market and our decisions, as well as the stochastic effectiveness (rewards) of the taken action. We apply an approximate value iteration (<inline-formula><tex-math id="M3">\begin{document}$ AVI $\end{document}</tex-math></inline-formula>) algorithm on a numerical example and compare the results with four different policies to highlight our managerial contributions. In the end, the validity of our proposed approach is assessed against a genetic algorithm. To do so, we simplify the environment by fixing the competitor's reaction and considering a deterministic environment.</p>