Andrea Seidl – University of Vienna, Autriche
In the digital economy, it is frequently observed that products become more valuable the more people use it. To account for such network effects, we introduce a new diffusion equation in a dynamic model of the firm with the aim to obtain the advertising policy that maximizes firm profits. Also an advertising budget is introduced and we examine its effects.
We find that introduction of the network effect leads to a critical mass of the sales level, the introduction of an advertising budget to the existence of an abnormal threshold equilibrium. We identify parameter ranges for which indifference points occur.