Digital advertising spillover, online-exclusive product launches, and manufacturer-remanufacturer competition

Abstract

Manufacturers launch and advertise new generations of products through e-retailers. However, this advertising effort also benefits independent remanufacturers selling the previous generation of the same product online because of product recommendation algorithms and consumer category search. Through a stylized game-theoretic model, we investigate how independent, arm’s-length, and cooperative digital advertising strategies by a manufacturer and e-retailer unintentionally displace the sales of a new product to the benefit of an independently remanufactured alternative due to digital advertising spillover. We consider the manufacturer’s and remanufacturer’s relative production costs, the degree of substitutability between the two products, and the degree to which advertising spillover from the new product to the remanufactured product occurs. Further investigating the latter issue, we also consider that the remanufacturer’s advertising may spill over to the new product’s benefit, although at a comparatively weak level. Our results explore the optimal digital advertising strategy and effort in different conditions. We give recommendations to the manufacturer to maximize profits, which sometimes, unintuitively, involves sacrificing sales quantity and wholesale price under a cooperative advertising strategy to reduce advertising expenditures that would otherwise significantly benefit the remanufacturer’s product. A numerical analysis shows our findings to be robust and in an extension we explore the scenario that the manufacturer possesses its own direct channel.