The Sethi model was developed by Suresh P. Sethi and describes the process of how sales evolve over time in response to advertising. The rate of change in sales depend on three effects: response to advertising that acts positively on the unsold portion of the market, the loss due to forgetting or possibly due to competitive factors that act negatively on the sold portion of the market, and a random effect that can go either way.
Contents
Suresh Sethi published his paper "Deterministic and Stochastic Optimization of a Dynamic Advertising Model" in 1983. The Sethi model is a modification as well as a stochastic extension of the Vidale-Wolfe advertising model. The model and its competitive extensions have been used extensively in the literature. Moreover, some of these extensions have been also tested empirically.
Model
The Sethi advertising model or simply the Sethi model provides a sales-advertising dynamics in the form of the following stochastic differential equation:
Where:
Explanation
The rate of change in sales depend on three effects: response to advertising that acts positively on the unsold portion of the market via
Example of an optimal advertising problem
Subject to the Sethi model above with the initial market share
where
The function
where
The optimal control for this problem is
where
and