Analyzing the Impact of Promotions on Manufacturer and Retailer Performance

Abstract

Promotional strategies used by manufacturers (or retailers) influence not only their own outcomes, but also the outcomes of retailers (or manufacturers). As cooperation of both the parties is needed for successful implementation of promotional strategies, the promotions used by either party should provide outcomes that are positive for the other party. The authors propose a framework for examining (1) the effect of promotional strategies on both manufacturer and retailer profitability and (2) which of two promotional strategies (retail price cut or coupon promotion) yields greater total profitability to achieve an exogenously given sales level. The proposed framework also helps in identifying conditions when conflict is likely to occur between manufacturer and retailer, and suggests a cooperative strategy to resolve the conflict.