A Model of Adaptive Control of Promotional Spending

A simple model of adaptive control of promotional spending is analyzed. In the model, company sales (and therefore profits) are functions of promotional spending rate. Sales response to the promotion changes with time as a result of changes in a parameter of the sales response function. Information about sales response is collected in each time period by performing an experiment. On the basis of present and past information, the promotion rate is set to maximize expected profit in the next period. The experiment is chosen to minimize the combined costs of imperfect information and experimentation. A numerical example is studied analytically and by simulation the adaptive system appears to work well. In a sensitivity analysis, the system based on one underlying model of the market is found to perform well when the underlying model is changed considerably. A Model of Adaptive Control of Promotional Spending