EFFECTIVENESS OF COOP ADVERTISING PROGRAMS IN COMPETITIVE DISTRIBUTION CHANNELS

Abstract

We propose a model of retail promotions for competitive distribution channels and investigate whether cooperative advertising programs are profitable for such channels. While previous studies showed that coop programs increase total channel profits in bilateral monopolies, no evidence of such a result has been provided for channels where competition is present at the manufacturing and the retailing levels. In this paper, we consider a distribution channel formed by two manufacturers and two retailers and propose a model that accounts for brand and store substitution effects generated by the retailer's promotional efforts. The efficiency of the coop plan is investigated by comparing equilibria of four non-cooperative games; one where manufacturers do not offer any promotional support to the retailers, one where manufacturers do offer such a support and two scenarios where in turn only one manufacturer is offering such program. We show that when competition is introduced, coop ad programs may be due to a prisonner's dilemma situation for the manufacturers. The benefit for retailers and consumers is also assessed.