A strategic study on dynamic investment of online advertising in two-echelon supply chain disturbed by the spillover effect

Abstract

ABSTRACT A differential game model has been utilised in this paper to analyse the dynamic strategic problems of online advertising in a two-echelon supply chain. First, the level of spillover effects has been introduced to examine the impact of different types of online advertising. Second, based on the improved Lanchester model, a dynamic investment decision model for online advertising has been developed. The results of the simulation describe the market share, online advertising investment amount and profit changes over time. Finally, by using the Rubinstein bargaining model, a proposal for a distribution mechanism is developed to achieve the coordination of a two-echelon supply chain system under strategic alliances. We find that: (1) The e-retailer’s use of position-fixed online advertising is inversely proportional to the spillover effect. (2) When the two e-retailers are in a symmetrical position, the manufacturer is better off by choosing the e-retailer to form the strategic alliance; when in an asymmetric position, a manufacturer is expected to choose to not give e-retailer subsidies to maximise the supply chain profits. (3) The party with a stronger negotiation ability may bear more losses even though it may gain more profits.