Analysis of Firm's Revenue Dynamics Based on Non-Price Factors of Demand

<p>This research is devoted to the theoretical basis of advertising budget optimization. The study focuses on some specific cases in which the optimal advertising policy for the firms can be found. The main goal is to determine how much a firm should spend on advertising in a particular period of time given some assumed conditions. The additional task is to analyze how significant will be the impact of deviation from the optimal strategy. Moreover, some possible planning and budgeting principles concerning selling and advertising expenses are examined in this paper.</p><p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In this project an attempt was made to study dynamic interaction between an intensively advertising firm and its customers. The theoretical approach of utility function maximization was employed to develop a static model of customers&rsquo; reaction to advertising. Then, given some additional assumptions, dynamics of firms&rsquo; revenue and profit were considered using a computer simulation. A complex behavior of long-run revenue and profit was discovered. Strategies of advertising budget optimization for the firm were derived from the revenue dynamics under certain external conditions.</p><p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In this work the model of the profit and revenue dynamics of the firm was derived from the two different sets of preconditions and assumptions. The first case was based on the assumption about unit elasticity of the demand, while the other version involves more detailed set of prerequisites. For both approaches the model takes the form of the quadratic recurrence relation, which generates complicated and hardly predictable behavior, which can be similar to real world time series of financial results. This fact provides excellent opportunity for further research with the employment of advanced econometric methods. More realistic dynamic models based on the presented theoretical approach can be developed for some particular cases and tested on the real data. New interpretations of the features of this model can be suggested to improve and deepen understanding of decision making concerning selling and advertising expenses. Moreover, a further study of suppositional interactions between customers, company and government within the framework of the presented model can be carried out using game theory methods.</p>