Dynamic cooperative promotion in the presence of consumer reference effect with competing retailers

Abstract

This paper studies the cooperative promotion problem in the presence of the promotion reference effect. We consider retailer price-reduction promotion activities that enhance their sales but may impair brand image for the manufacturer. Moreover, because frequently used promotion induces a promotion reference effect on customers, we investigate how the promotion reference effect influences cooperative control strategies. We do so by examining the context in a supply chain with one leading manufacturer and two competing retailers, where the manufacturer implements a cooperative promotion program for the retailers. We use differential game models vis-a-vis dynamic promotion control strategies and cooperative promotion strategies under the scenario of existence and non-existence of the reference effect. Findings show that the presence of a promotion reference effect increases profit for the manufacturer but generates reduced profit for the retailers. We also find that the manufacturer augments the level of national brand advertising when incorporating the reference effect, and retailers raise (lower) their degree of promotion when the negative effect is low (high).