Effects of accrual constraints in cooperative advertising programs for distribution channels with one manufacturer and two retailers

Abstract

AbstractThis paper considers a distribution channel with one manufacturer and two independent retailers and investigates how the accrual rate in a cooperative advertising program affects channel members’ performances. When the two retailers’ profit margins are the same, the accrual rate cannot benefit the manufacturer, which coincides with previous studies. However, if the retailers hold different profit margins, the accrual rate may benefit the manufacturer, which is never reported in existing literature. Specifically, when the market faced by the higher‐profit‐margin retailer exhibits a lower advertising efficacy, the manufacturer always prefers using an accrual rate if his profit margin is sufficiently high. Numerical simulations show that even when the manufacturer's profit margin is low, using an accrual rate may also lead to a Pareto improvement for the channel members. The main findings can be extended to the scenario with more than two retailers or with endogenously decided prices of channel members.