Cooperative Advertising in a Dynamic Three‐Echelon Supply Chain

Abstract

We propose a model to assess the value of a distributor in a dynamic stochastic cooperative advertising supply chain in which a manufacturer wholesales its product to a distributor who in turn sells it to a retailer. Moreover and importantly, the distributor also intermediates the pricing and advertising decisions between the manufacturer and the retailer. For the resulting three‐player hierarchical game formulation of the supply chain, we characterize the feedback Stackelberg equilibrium in terms of a system of coupled algebraic equations and show it to admit a unique solution. We find that the value added by the distributor to the supply chain depends critically on the nature of the demand function for the product, a result that has practical implications for the kinds of product where having a distributor is most desirable. Second, our model indicates that the presence of the distributor can enhance the margins of both the retailer and the manufacturer relative to the case of no distributor, and provide explicit conditions for this to occur. Third, we present numerical analysis that indicates that if the distributor generates sufficiently large transportation cost savings, then the three‐echelon supply chain can lead in the long run to higher market awareness, lower advertising expenditure, and higher value extracted, relative to the two‐echelon model. Finally, in addition to retailer advertising that is subsidized by the manufacturer, we also provide the manufacturer an option to do national advertising and show its viability.