Cooperative advertising models under different channel power structure

Abstract

Cooperative (co-op) advertising is an arrangement between manufacturer and retailer, where two members initiate their respective advertising to help develop brand, motivate sales, and other purposes. This paper focuses on cooperative advertising in a supply chain consisting of one manufacturer and one retailer. As two basic elements of a supply chain, the channel power structure and information structure affect the firm’s pricing and advertising decisions. We attempt to investigate how they optimally decide their marginal returns and advertising investments. Utilizing the Stackelberg game theory, we derive the equilibrium of five scenarios in two different cases, i.e., (1) either the manufacturer or the retailer is acting as the Stackelberg leader and (2) whether the Stackelberg leader knows the advertising investment of his follower. Then we make a comparison and obtain some managerial implications as follows: (1) the supply chain power structure and the relative advertising effectiveness coefficient exert great influence on the optimal supply chain decisions, (2) the supply chain members’ profit is not parallel to their corresponding power structure, if the retailer’s advertising effectiveness is greater than the manufacturer’s, the Manufacturer-dominated Stackelberg game is a win–win strategy, and vice versa, (3) the dominant member can improve his and the overall performance of the supply chain by having the advertising information of the other.