Cooperative promotion under demand uncertainty

Abstract

Numerous manufacturers use brand advertising or make related promotional efforts to differentiate their product from other products on the market and stimulate demand. In the presence of manufacturer promotional efforts, cooperative promotion is the practice of a retailer sharing the manufacturer׳s promotional cost to stimulate sales. The retailer is interested in knowing how the promotional cost-sharing policy affects the channel members׳ decisions and, consequently, the profits. In this study, we considered a decentralized supply chain in which a risk-neutral manufacturer sells a single product to a risk-neutral retailer under manufacturer promotional efforts and demand uncertainty. The manufacturer determines the optimal wholesale price and promotional efforts and the retailer determines the optimal order quantity and retail price, both of whom are seeking to maximize their own profits. We demonstrated that the promotional cost-sharing policy motivates the manufacturer to increase promotional efforts and the retailer to order more products. However, the retailer is not willing to share the manufacturer׳s promotional cost when the retail price is exogenous because their profit will decrease. On the contrary, the retailer is willing to share the manufacturer׳s promotional cost only when the retail price is endogenous.