A Study of Cooperative Advertising in a Manufacturer-Retailer Supply Chain

Abstract

Cooperative advertising is often defined as an arrangement whereby a manufacturer pays for part of the expenditures of local advertising undertaken by a retailer who is responsible for selling products made by the manufacturer. Besides local advertising, manufacturers are interested in reinforcing the brand image in the eyes of potential consumers by national advertising. In a word, the emphasis of national branding is to create favorable product attitudes in the long run, whereas local advertising is often price-oriented for the short time. This paper employs two game-theoretic models to analyze cooperative advertising problem in a manufacturer-retailer supply chain without considering the ambiguous interaction between national branding and local advertising. Recent change in power shifting from manufacturers to retailers relaxes the leader-follower relationship and leads to a simultaneous-move game. The results show that manufacturer's subsidy policy is affected by the gaming structure. Other interesting results include that the Stackelberg game is Pareto-optimal to the Nash game for the co-op advertising. Comparative statics for Stackelberg game imply that the retailer is either a dependency of the leader or acting independently as she does in Nash game. Our effort calls for game theory to be an essential tool in the analysis of supply chains issues with multiple agents pursuing either conflicting or compatible objectives.

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