Why We Choose Cooperative Advertising? An Analysis of Channel Competition

Abstract

Conventional wisdom believes that the spring-up of cooperative advertising is owing to the difference between the manufacturer's national advertising and the retailer's local advertising. This paper develops a channel competition model to investigate the efficiency when manufacturers or retailers shoulder the responsibility of advertising. It is found that if manufacturers sponsor advertising, they are likely to engage in fierce advertising competition. Yet if it is the retailers who decide the advertising volume, they have not any motivation to advertise at all! This is because all the extra earnings received from advertising would be robbed by the manufacturers. Therefore, it is claimed that cooperative advertising may be a consequence of the retailer's downstream role. In a competitive retail market, the downstream sector is not as likely as the upstream firm to invest heavily in advertising, thereby avoiding the prisoner's dilemma.