Retail promotions with negative brand image effects: Is cooperation possible?

Abstract

We consider a channel of distribution with a single manufacturer M and a retailer R. M advertises in national media to build up the image for one of his brands. R promotes locally the brand to increase sales revenue, but these efforts are harmful to the brand image. We address the question whether the two firms can agree to participate in a cooperative promotion program where M pays part of the costs incurred by R when promoting the brand. The model is a differential game with an infinite time horizon. Two Nash equilibria serve as benchmarks for assessing the feasibility of the cooperative program: one in which R is myopic and one in which R is far-sighted. Our results show that a cooperative program is implementable if the level of initial brand image is “small”, or if the level of initial brand image is “intermediate” and promotion is not too damaging to the brand image. In the remaining cases a game without promotional support is played and R should behave myopically in such cases.