Dynamic brand-image-based production location decisions

In this paper, we study the dynamic production location decisions of a manufacturer of a certain branded product. Considering brand-image as a form of goodwill, we extend the well-known Nerlove-Arrow dynamic model by adding both country-image and price. Formulating an optimal control problem for a group of countries in which the cost of production is convexly increasing with country-image, we are able to develop optimal decision rules for a manufacturer regarding the location of production and pricing over time. The resulted optimal policy has a very interesting pattern. Assuming that the demand rises by more than the value of the new brand-image in percentage terms, then, if brand-image is increasing toward a stationary value level, the optimal policy should be to initially locate production in countries with high image and set a high price that signals high quality. Later, the production should gradually shift to countries with lower production costs and lower image and the price lowered until the stationary value level is reached. For brand-images beyond the stationary value level, the location of production should start in a country with low costs and country-image while setting prices that signal relatively low quality. Over time, production should be shifted to countries with gradually higher costs and images while setting higher prices until the brand-image approaches the level of stationary value.