Vertical cooperative advertising and pricing decisions in a manufacturer–retailer supply chain: A game-theoretic approach

Abstract

Manufacturers can increase the advertising expenditures of their retailers by bearing a fraction of the occurring costs within the framework of a vertical cooperative advertising program. We expand the existing research which deals with advertising and pricing decisions in a manufacturer–retailer supply chain contemporaneously. By means of game theory, four different relationships between the channel members are considered: Firstly, three non-cooperative games with either symmetrical distribution of power or asymmetrical distribution with one player being the leader in each case, and one cooperative game where both players tend to maximize the total profit. The latter is complemented by a bargaining model, which proposes a fair split of profit on the basis of the players’ risk attitude and bargaining power. Our main findings are as follows: (a) In contrast to previous analyses, we do not limit the ratio between manufacturer’s and retailer’s margin, which provides more general insights into the effects of the underlying distribution of power within the channel. (b) The highest total profit is gained when both players cooperate. This behavior puts also the customers in a better position, as it produces the lowest retail price as well as the highest advertising expenditures compared to the other configurations.