Research on manufacturer encroachment with advertising and design of incentive advertising: A game-theoretic approach

Abstract

This paper studies a supply chain with manufacturer encroachment where both the manufacturer and the retailer invest in advertising to explore the effects of manufacturer encroachment and different quantity decision sequence on advertising strategy and profits for the players. It is known that manufacturer encroachment usually intensifies the completion, which may make the retailer worse off. Our results show that (1) the retailer tends to increase his advertising expenditure under encroachment if manufacturer’s direct selling cost increases and the manufacturer may increase that in most cases; (2) the retailer is better off with encroachment when the manufacturer’s direct selling cost is high; (3) the manufacturer may benefit from encroachment when his direct selling cost is high or low, which is related with his advertising effectiveness; (4) encroachment may lead to a win–win result, which depends on the relative advertising effectiveness and the manufacturer’s direct selling cost. Additionally, we consider two ways of advertising cooperation. Results show that centralized advertising decision-making is not always conducive to both firms. If one’s advertising effectiveness is relatively high, he can obtain higher profit in the decentralized cooperative advertising program. Usually, the cooperative advertising program is more commonly use. Based on this, we further propose an incentive cooperative advertising scheme which makes all players get higher profits.