Effects of Accrual Rates in Cooperative Advertising Programs for Channel Members with Risk Preferences

Abstract

Cooperative advertising (coop-ad) programs with both accrual rates and participation rates are popularly adopted in practice by manufacturers and retailers to share advertising expenditures. However, results from extant literature show that the accrual rates always negatively impact the manufacturers’ performances, indicating a gap between theory and practice. In this paper, we study a coop-ad program in a distribution channel consisting of a manufacturer and a retailer with risk preferences under demand uncertainty. When both the channel members are risk-neutral, we show that an elaborately specified accrual rate can help reach channel coordination, although the accrual rate always negatively impacts the manufacturer’s performance. When the manufacturer is risk-averse and the retailer is risk-neutral, the accrual rate may positively impact the manufacturer’s performance, and in particular, the manufacturer does prefer a coop-ad program with an accrual rate if his risk-averse level is high and/or the demand volatility is high. When both the channel members are risk-averse, numerical examples illustrate that an accrual rate may benefit both members when the retailer has high profitability and low risk-averse level. These findings, seemingly never reported in the literature, provide plausible explanations for the fact that accrual rates are usually included in coop-ad programs in real-world practice.