A singular control model with application to the goodwill problem

DOI10.1016/J.SPA.2008.01.001MaRDI QIDQ952745zbMATH OpenOpenAlexWikidataFDO

Authors Andrew Jack, Timothy C. Johnson, Mihail Zervos

Publication date 14 November 2008

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0711.2143

zbMATH Keywords

singular controlmonotone follower problemgoodwill problemsecond-order linear ODE's

Mathematics Subject Classification ID

Diffusion processes (60J60) Existence theories for optimal control problems involving ordinary differential equations (49J15) Dynamic programming in optimal control and differential games (49L20) Stochastic models in economics (91B70) Optimal stochastic control (93E20)

Abstract: We consider a stochastic system whose uncontrolled state dynamics are modelled by a general one-dimensional It^{o} diffusion. The control effort that can be applied to this system takes the form that is associated with the so-called monotone follower problem of singular stochastic control. The control problem that we address aims at maximising a performance criterion that rewards high values of the utility derived from the system's controlled state but penalises any expenditure of control effort. This problem has been motivated by applications such as the so-called goodwill problem in which the system's state is used to represent the image that a product has in a market, while control expenditure is associated with raising the product's image, e.g., through advertising. We obtain the solution to the optimisation problem that we consider in a closed analytic form under rather general assumptions. Also, our analysis establishes a number of results that are concerned with analytic as well as probabilistic expressions for the first derivative of the solution to a second order linear non-homogeneous ordinary differential equation. These results have independent interest and can potentially be of use to the solution of other one-dimensional stochastic control problems.

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Cited in

(19)

• Multidimensional singular control and related Skorokhod problem: sufficient conditions for the characterization of optimal controls
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• Irreversible capital accumulation with economic impact
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