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Is the Dorfman-Steiner rule always optimal?

Publication: American Economist
Publication Date: 22-SEP-05 		Format: Online
Delivery: Immediate Online Access

Article Excerpt
I. Introduction

Fifty years ago, Dorfman & Steiner (1954) demonstrated the optimal level of advertising for a monopolist occurs when the advertising to sales ratio is equal to the ratio of the advertising elasticity to the price elasticity, which is commonly referred to as the Dorfman-Steiner advertising rule. Economists state the Dorfman-Steiner advertising rule "... must be met for the monopolist to maximize profit with respect to the choice of advertising effort, S *, and the choice of quantity, Q *, or price P * (Pepall, Richards & Norman, 2002, 558)." This is true given the demand equation is not independent with respect to advertising and price or quantity (with an inverse demand equation).

But when consumer demand is independent with respect to advertising and price or quantity, the Dorfman-Steiner rule is an identity and thus always holds independent of the price elasticity of demand, the advertising elasticity...

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