Cooperative Advertising Program Research Articles

Effects of accrual constraints in cooperative advertising programs for distribution channels with one manufacturer and two retailers

AbstractThis paper considers a distribution channel with one manufacturer and two independent retailers and investigates how the accrual rate in a cooperative advertising program affects channel members’ performances. When the two retailers’ profit margins are the same, the accrual rate cannot benefit the manufacturer, which coincides with previous studies. However, if the retailers hold different profit margins, the accrual rate may benefit the manufacturer, which is never reported in existing literature. Specifically, when the market faced by the higher‐profit‐margin retailer exhibits a lower advertising efficacy, the manufacturer always prefers using an accrual rate if his profit margin is sufficiently high. Numerical simulations show that even when the manufacturer's profit margin is low, using an accrual rate may also lead to a Pareto improvement for the channel members. The main findings can be extended to the scenario with more than two retailers or with endogenously decided prices of channel members.

Effects of Accrual Rates in Cooperative Advertising Programs for Channel Members with Risk Preferences

Cooperative advertising (coop-ad) programs with both accrual rates and participation rates are popularly adopted in practice by manufacturers and retailers to share advertising expenditures. However, results from extant literature show that the accrual rates always negatively impact the manufacturers’ performances, indicating a gap between theory and practice. In this paper, we study a coop-ad program in a distribution channel consisting of a manufacturer and a retailer with risk preferences under demand uncertainty. When both the channel members are risk-neutral, we show that an elaborately specified accrual rate can help reach channel coordination, although the accrual rate always negatively impacts the manufacturer’s performance. When the manufacturer is risk-averse and the retailer is risk-neutral, the accrual rate may positively impact the manufacturer’s performance, and in particular, the manufacturer does prefer a coop-ad program with an accrual rate if his risk-averse level is high and/or the demand volatility is high. When both the channel members are risk-averse, numerical examples illustrate that an accrual rate may benefit both members when the retailer has high profitability and low risk-averse level. These findings, seemingly never reported in the literature, provide plausible explanations for the fact that accrual rates are usually included in coop-ad programs in real-world practice.

Effects of consumer loyalty and product web compatibility on cooperative advertising and pricing policies in a dual-channel supply chain

A common practice for brand manufacturers is to operate dual distribution channels in which they offer an online channel for direct sales to end consumers and an independently-managed retail channel for sales in physical stores. This structure enables the manufacturers to reach multiple segments of consumers with different online and offline shopping preferences, but it may create channel conflicts due to the manufacturers’ competitive position in the end market. Cooperative advertising programs can be implemented in response to the emerging competitive dynamics between the manufacturers and the retailers. We investigate the impact of the consumers’ sales channel preference (i.e., “consumer loyalty”) and the product compatibility with online shopping (i.e., “product web compatibility or web fit”) on the cooperative advertising and pricing decisions of a manufacturer and a retailer in a dual-channel supply chain. We use game-theoretical models and characterize the firms’ equilibrium behaviors under different power structures in the channel. Our results indicate that the level of the retailer’s advertising investment and the manufacturer’s reimbursement in the cooperative advertising program depend critically on consumer loyalty, product web compatibility, and the power distribution among the channel members. For example, when the channel power is symmetrically distributed or held asymmetrically by the retailer, the retailer’s local advertising level increases as the product web compatibility decreases or the proportion of store-loyal consumers increases; whereas this trend is reversed when the manufacturer is the channel leader. We examine how the introduction of the direct channel affects the profits, and we generate additional managerial insights from numerical experiments.

Cooperative advertising in social networks with positive externalities

AbstractWe study the decisions of a supplier and retailer in a cooperative advertising program to sell divisible products to consumers in a social network with positive externalities. The supplier decides its participation rate, the retailer with a limited budget decides discriminative advertising expenditure for consumers, and consumers decide their purchase levels. In this study, we solve the subgame perfect equilibrium of the game between the supplier, retailer, and consumers. The equilibrium leads to a new demand function of advertising expenditure, which is different from those demand functions typically assumed in existing studies. In the equilibrium, the higher a consumer's network influence quantified by Bonacich centrality, the higher is the retailer's advertising expenditure on the consumer. We characterize the supplier's participation rate by two network‐dependent thresholds. If the retailer's budget level is lower than one threshold or higher than the other, the participation rate will not depend on the network structure. Although both parties' profits and the retailer's advertising expenditure increase with the network density, the supplier's participation rate decreases with it. Finally, the retailer's profits can be improved significantly by exploiting the network information and advertising cooperatively.

Managing advertising investments in marketing channels

This paper investigates how should manufacturers optimally allocate resources to retailer-initiated (retailer) advertising through cooperative advertising programs and own (manufacturer) advertising in a bilateral monopoly. Retailer advertising stimulates immediate sales but may also harm long-term (post-advertising) demand, whereas manufacturer advertising aims at building brand equity and stimulates both immediate and long-term sales. A game-theoretic model in which a manufacturer and a retailer set pricing and advertising decisions over a two-period planning horizon is developed to account for the differences between manufacturer and retailer advertising. We characterize equilibrium solutions for four advertising scenarios for the manufacturer, ranging from no investment in any advertising activity to undertaking own advertising and supporting retailer advertising simultaneously. Comparing the two players’ equilibrium strategies and profits across these scenarios, we find that manufacturers should avoid offering exclusively cooperative advertising programs to retailers. When retailer advertising positively influences long-term sales, manufacturers should offer cooperative advertising supports to retailers in addition to undertaking their own advertising. When retailer advertising negatively affects long-term sales, manufacturers can still undertake own advertising and offer cooperative advertising under certain conditions. However, if these conditions are not met, focusing exclusively on own advertising is their best advertising strategy. Retailers also prefer scenarios in which manufacturers advertise, but may choose not to participate in manufacturers’ cooperative advertising programs. This leads to suboptimal outcomes if cooperative advertising programs are not enhanced by additional incentives (e.g., side payments or other services).

Cooperative advertising in competing supply chains and the long-term effects of retail advertising

The profitability of cooperative advertising (CA) programs is analyzed in a supply chain where competing manufacturers sell their products through competing retailers. We study a two-period game-theoretic model that accounts for positive and negative long-term effects of retail advertising on consumer preferences. We obtain closed-form equilibria in two particular cases where either the stores or the products are perfectly differentiated. For the general case where both products and stores can be substitutable, we develop a numerical algorithm to find the equilibrium. We compare the equilibria obtained in games where CA is offered and where it is not. The results show that the second-period effects of first-period retail advertising and the levels of substitutability between products and between retailers all play a key role in assessing the profitability of CA programs. CA only benefits manufacturers when store and product competition are both low, or when retailers are highly differentiated. However, in most cases, retailers do not find such programs profitable except when product substitutability levels are high while store competition is low. Finally, CA can only be win-win arrangements for manufacturers and retailers when the level of store differentiation is very high, the products are moderately substitutable, and first-period retail advertising has a substantial positive impact on second-period sales. The manufacturers’ cooperative advertising support rates increase with the second-period effects of retail advertising.

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

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.

The impact of platform fee scheme on manufacturer-E-tailer co-operative advertising: A game-theoretic analytical study

This study analyzes how the new online platform-selling format affects the optimal co-operative advertising choices of both the manufacturer and the e-commerce platform (e-tailer), and explores the effects of the e-tailer’s contractual forms and commission fees on these choices. In the model, the manufacturer can decide its advertising expenditure as well as the level of participation in the e-tailer’s co-operative advertising program. Unlike the traditional reselling format, in platform selling the manufacturer can decide the retail price charged to the customer directly. The underlying forces of the profit corrosion effect of the commission fee and the demand expansion effect of co-operative advertising reshape the channel’s outcomes. Our findings show that a high commission fee can hinder or foster investment in the co-operative advertising program. Furthermore, the e-tailer always prefers the revenue-sharing scheme under which both e-tailer and manufacturer are better off in most cases, but it results in a lower participation rate and profitability for the manufacturer compared with the per-unit rent scheme. Moreover, the supply chain’s performance could be better when the relative efficiency of co-operative advertising is either sufficiently low or sufficiently high.

Coordination through cooperative advertising in a two-period consumer electronics supply chain

Firms in the consumer electronics industry frequently launch new styles of their products, which leads to a “two-period” phenomenon in their product sales. Only a few published articles have considered two-period models in cooperative advertising. This paper investigates co-op advertising strategies in a two-period supply chain consisting of a single manufacturer and a single retailer. Utilizing game theory, we consider two different scenarios: a decentralized scenario with a cooperative advertising program and an integrated scenario. Aside from these scenarios, we propose a supply chain contract to coordinate this supply chain system. This paper has the following conclusions: (i) the manufacturer usually does not provide the same advertising subsidy strategy for the two generation products in the same period; (ii) the manufacturer may provide a low subsidy rate to the retailer if the advertising long-term effect is strong; and (iii) we demonstrate that the two-way subsidy contract can achieve a perfect supply chain coordination if a transfer payment exists.

Consignment contracts with cooperative programs and price discount mechanisms in a dynamic supply chain

This paper investigates whether a supply chain can achieve coordination by implementing two mechanisms: a cooperative advertising program and a price discount mechanism. We start by analyzing a consignment contract with a revenue-sharing agreement in which a manufacturer decides both the price and the quality investment while the retailer sets the store advertising efforts. The manufacturer is the brand owner and increases the goodwill through quality and pricing. We solve three dynamic games, in which the manufacturer is the Stackelberg leader, and compare the related solutions. We discover that the manufacturer, as chain leader, will always propose the adoption of a coordination mechanism. When the manufacturer opts for a cooperative program, the retailer is always economically better off; thus, a cooperative program is always profit-Pareto-improving. When the manufacturer opts for a price discount mechanism, the retailer is always economically worse-off because the discount applies only to her margins. Nevertheless, the price discount mechanism is profit-Pareto-improving in the case of high production cost: The price discount allows for considerably reducing the retail price, which translates to a substantial increase in demand. In all other cases, the retailer sets zero price discount, thus preferring a non-coordinated framework.

Cooperative advertising: A way escaping from the prisoner’s dilemma in a supply chain with sticky price

This paper develops a differential game in a two-player supply chain with sticky price where a manufacturer provides a cooperative advertising program for a retailer. The manufacturer sets the wholesale price while the retailer decides the order quantity and advertising level. Either of the players has two behavioral choices: Myopia and farsightedness. We derive and compare the equilibrium strategies under four different behavioral combinations of the two players. Our analysis shows that, to be farsighted is the equilibrium behavior-choice result for the manufacturer and the retailer, while either of the players prefers a myopic partner. When the marginal contribution of the advertising to the notional price is low, instead of the farsighted equilibrium behavior, both players achieve the Pareto optimality when acting myopically, which traps them into a prisoner’s dilemma. Meanwhile, the myopia of both players is most desirable for the whole supply chain. When both the advertising’s marginal contribution to the notional price and the advertising subsidy rate are sufficiently high, not only can the players escape from the prisoner’s dilemma, but also their farsighted behavior-choice equilibrium can make them realize the Pareto optimality. Furthermore, a low degree of price stickiness helps the players escape from the prisoner’s dilemma and achieve their Pareto optimality at the farsighted equilibrium more easily, and a negotiated advertising subsidy rate enlarges this benefit.

Vendor Management Inventory with consignment contracts and the benefits of cooperative advertising

Most of the cooperative advertising literature has focused on studying the effects of such programs considering marketing variables. This paper integrates production and inventory management with pricing and advertising considerations to assess the effects of cooperative advertising programs in bilateral monopolies. We consider a supply chain where a Vendor Managed Inventory (VMI) along with a consignment contract is implemented to coordinate the chain. We develop and solve a differential model for two games. The first one is a benchmark scenario where no cooperative advertising is offered, while the manufacturer offers the cooperative program in the second game. The main results show that cooperative advertising programs, usually considered as successful marketing initiatives, can be very difficult to implement in a supply chain undertaking a VMI policy with a consignment contract, in which operations and marketing interface is taken into account. A cooperative program mainly hurts the manufacturer’s profits, and can be profit-Pareto-improving only in a few cases. Although the retailer is generally willing to receive a support from the manufacturer, she can opt for a non-cooperative program when the largest part of the supply chain profits goes to the manufacturer. We developed several special cases to strengthen our findings.

Dynamics and implications on a cooperative advertising model in the supply chain

In this paper, the theory of nonlinear dynamic system is applied to a cooperative advertising model in the supply chain, where the decision-making mechanism of firms is modeled as a dynamic adjustment process and the advertising response is assumed to be an exponential function. We find four possible Nash equilibrium points in this dynamic system and provide the conditions for their existence. After that, we analyze the impacts of key parameters on the stability of the positive Nash equilibrium point and prove that two kinds of bifurcation may occur when this positive Nash equilibrium point becomes unstable. Finally, sensitivity analysis and robustness test are performed to obtain some managerial insights. This study provides some valuable insights both into the cooperative advertising programs and into the features of dynamic game with exponential demand function.

Incentive mechanism based on cooperative advertising for cost information sharing in a supply chain with competing retailers

This paper proposes a new motivation for information sharing in a decentralized channel consisting of a single manufacturer and two competing retailers. The manufacturer provides a common product to the retailers at the same wholesale price. Both retailers add their own values to the product and distribute it to consumers. Factors such as retail prices, values added to the product, and local advertising of the retailers simultaneously have effect on market demand. Each retailer has full information about the own added value which is unknown to the manufacturer and other retailer. The manufacturer uses a cooperative advertising program for motivating the retailers to disclose their private information. A numerical study is presented to compare different scenarios of information sharing. Computational results show that there is a condition in which full information sharing is beneficial for all members of the supply chain through cooperative advertising program and, therefore, retailers have enough incentive to disclose their cost information to the manufacturer.

Cooperative advertising programs: are accrual constraints necessary?

AbstractThis paper investigates how the use of an accrual constraint in a cooperative advertising program affects channel members' profits in a bilateral monopoly, as well as their pricing and advertising decisions. The main findings indicate that, compared to unconstrained cooperative advertising programs, when an accrual constraint is used and the manufacturer's contribution to the retailer's advertising costs exceeds the accrued cooperative advertising budget, the retailer reduces both her retail price and advertising efforts to the level where cooperative advertising is not offered; while the manufacturer also reduces his wholesale price and advertising efforts, but this time, the wholesale price remains higher than when there is no cooperative advertising. These strategic moves translate to less (more) profits for the manufacturer (retailer). The use of an accrual constraint is counterproductive for the manufacturer as the retailer uses the accrued advertising fund as a side payment rather than a direct incentive to invest more in advertising. The manufacturer and retailer are better off when unconstrained cooperative advertising programs are supplemented with other incentives, including side payments and advertising support services.

Assessing the profitability of cooperative advertising programs in competing channels

A large literature studied the profitability (effectiveness) of cooperative advertising programs (CAPs) in distribution channels, but very few studies modeled pricing decisions in competitive markets under different channel structures. This paper fills this gap. We propose a game-theoretic model where two competing channels make pricing and promotional decisions. The effectiveness of CAPs is studied under different channel structures to examine how vertical and horizontal externalities can impact the effectiveness of CAPs. Each channel structure can be integrated or decentralized to account for different vertical interaction effects, resulting in three cases: (i) both channels are decentralized (DD), (ii) both are integrated (II), and (iii) a hybrid structure where one channel is decentralized and is competing with an integrated channel (DI). We solve six non-cooperative games: (1) both manufacturers offer CAPs under DD, (2) only one manufacturer offers a CAP under DD, (3) both manufacturers do not offer CAPs under DD, (4) the decentralized manufacturer offers a CAP under DI, (5) the decentralized manufacturer does not offer a CAP under DI, and (6) the channel problem under II. Then, we obtain and compare equilibrium profits and strategies across these games. The main results indicate that the profitability of CAPs depends on the levels of price competition and of the advertising effects. Also, while manufacturers benefit from CAPs, retailers may not find such programs profitable. Finally, the decentralized or integrated structure of the competing channel significantly impacts the effects of cooperative advertising. For example, CAPs can effectively coordinate the DD channel and even help it exceed profits earned by a vertically integrated channel. However, in the DI case, although CAPs can improve total channel profits, they do not fully coordinate the channel.

Supply chain performance for deteriorating items with cooperative advertising

To study the effect of cooperative advertising on the supply chain of deteriorating items, this paper establishes a Stackelberg game model for a two-echelon deteriorating items supply chain composed of one manufacturer and one retailer under a given support program with an exogenous participation rate. The manufacturer as the leader determines the wholesale price and production rate, and the retailer as the follower determines the retail price and advertising strategies. The strategies of the players under the decentralized scenario and the centralized scenario are respectively characterized. Numerical simulations and sensitivity analysis are conducted to gain some managerial insights. It is shown that the pricing, advertising and production strategies are negatively correlated to deteriorating coefficient, and both the profit and the channel efficiency decrease with deteriorating coefficient; The interaction between price, advertising investment and production rate results in a higher retail price of the centralized channel compared to that of the decentralized channel; Implementing the cooperative advertising program does improve the performance of the supply chain in some cases and the participation rate roughly at 0.5 is most preferable, but it is also possible to distort incentive and damage the channel performance when the participation rate reaches a relatively high level.

A review of dynamic Stackelberg game models

Dynamic Stackelberg game models have been used to study sequential decision making in noncooperative games in various fields. In this paper we give relevant dynamic Stackelberg game models, and review their applications to operations management and marketing channels. A common feature of these applications is the specification of the game structure: a decentralized channel consists of a manufacturer and independent retailers, and a sequential decision process with a state dynamics. In operations management, Stackelberg games have been used to study inventory issues, such as wholesale and retail pricing strategies, outsourcing, and learning effects in dynamic environments. The underlying demand typically has a growing trend or seasonal variation. In marketing, dynamic Stackelberg games have been used to model cooperative advertising programs, store brand and national brand advertising strategies, shelf space allocation, and pricing and advertising decisions. The demand dynamics are usually extensions of the classic advertising capital models or sales-advertising response models. We begin each section by introducing the relevant dynamic Stackelberg game formulation along with the definition of the equilibrium used, and then review the models and results appearing in the literature.

Cooperative advertising for competing manufacturers: The impact of long-term promotional effects

The effectiveness of cooperative advertising programs is studied in a market where two competing manufacturers deal with an exclusive retailer and two products. Two two-stage game theoretic models are developed to analyze the long-term effects of retailer's promotions, which can be positive or negative, on the effectiveness of cooperative advertising. Closed-form equilibrium solutions are obtained and compared. We find that the level of product substitutability and the sign and magnitude of the long-term effects of retailer's promotions on sales determine whether cooperative advertising should be offered and accepted by the manufacturers and retailer. In particular, depending on the level of product substitutability, cooperative advertising can benefit both the manufacturers and retailer even when retailer's promotions negatively affect future sales. Conversely, it may not be in the interest of the manufacturers to offer cooperative advertising when the products are fairly undifferentiated regardless of the nature of the long-term effects of promotions. Finally, the manufacturers and retailer may refuse to respectively offer or participate in cooperative advertising programs that enhance total channel profits.

An integrative framework of cooperative advertising: Should manufacturers continuously support retailer advertising?

A two-period game is developed in a bilateral monopoly where, besides pricing decisions, the retailer and manufacturer can set their advertising and cooperative advertising support rates for each period. It is demonstrated that, in addition to the established continuous cooperative advertising programs, in which the retailer advertises and the manufacturer supports retailer advertising in each period, two other advertising schedules are possible. First, the retailer advertises in each period, while the manufacturer only supports the second-period advertising. Second, whether or not the manufacturer provides a cooperative advertising program in the first period, the retailer only advertises in the second period and receives advertising support. The conditions under which each of these advertising arrangements is implemented are identified. In a continuous cooperative advertising schedule, the manufacturer may change his advertising support over time depending on the nature of the long-term effects of retailer advertising. The implications of these findings are discussed.