Cooperative advertising in a supply chain with retail competition

Abstract

This research assesses the effects of cooperative (coop) advertising in a channel with competing retailers considering both advertising and pricing as decision variables. We develop a game-theoretic model and provide equilibrium solutions for two games. In Game 1, the manufacturer and the retailers do not use cooperative advertising (status quo); and in Game 2, coop advertising is implemented. We also obtain optimal solutions for the case where the channel is coordinated. Contrary to the results provided for one-manufacturer, one-retailer channels, we find that coop advertising may not be profitable for the retailers or for the channel, especially when the market is characterised by low levels of price competition and high advertising competition between retailers. Although it benefits the manufacturer, the total effect of cooperative advertising on the channel profit might be negative under such conditions. The results also show that coop advertising stimulates retailers’ spending but may result in lower advertising expenditures than for a fully coordinated channel. Finally, when coop advertising benefits the entire channel, it does not fully achieve results from vertical integration.