We develop a dynamic control model of a monopolist composed of two profit centers, e.g., an operations department in charge of\nthe product innovation and amarketing department controlling advertising effort as well as the retail price.Meanwhile, knowledge\naccumulating in product innovation and advertising effort which lead to reducing the corresponding investment cost is considered.\nThe customer inverse demand function depends jointly on the quality level as well as the product goodwill which can be improved\nby product innovation and advertising efforts. Our results show that the learning rates of product innovation and advertising effort\naffect the product innovation and advertising effort investments level. In addition, comparedwith the administered transfer-pricing,\nthe negotiation between the two departments results in a lower transfer price as well as a higher retail price. In the meantime, the\nadvertising effort is lower while the quality improvement effort is higher.What is more, higher profits to both departments and the\nfirm can be brought about by the negotiation means.
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