Optimal Advertising and Pricing in a Dynamic Durable Goods Supply Chain

Abstract

Cooperative advertising is an incentive offered by a manufacturer to influence retailers’ promotional decisions. We study a dynamic durable goods duopoly with a manufacturer and two independent and competing retailers. The manufacturer, as a Stackelberg leader, announces his wholesale prices and his shares of retailers’ advertising costs, and the retailers in response play a Nash differential game in choosing their optimal retail prices and advertising efforts over time. We obtain the feedback equilibrium policies for the manufacturer and the retailers in explicit form for a linear demand formulation. We investigate issues, like channel coordination and antidiscriminatory legislation, and also study a case, when the manufacturer sells through only one retailer and the second retailer sells a competing brand.