Co-op advertising models in manufacturer–retailer supply chains: A game theory approach

In the literature of cooperative (co-op) advertising, the focus of research is on a relationship in which a manufacturer is the leader and retailers are followers. This relationship implies the dominance of the manufacturer over retailers. Recent market structure reviews have shown a shift of retailing power from manufacturers to retailers. Retailers have equal or even greater power than a manufacturer when it comes to retailing. Based on this new market phenomenon, we intend to explore the role of vertical co-op advertising efficiency with respect to transactions between a manufacturer and a retailer through brand name investments, local advertising expenditures, and sharing rules of advertising expenses. Three co-op advertising models are discussed which are based on two noncooperative games and one cooperative game. In a leader–follower noncooperative game, the manufacturer is assumed to be a leader who first specifies the brand name investment and the co-op subsidization policy. The retailer, as a follower, then decides on the local advertising level. In a noncooperative simultaneous move game, the manufacturer and the retailer are assumed to act simultaneously and independently. In a cooperative game, the system profit is maximized for every Pareto efficient co-op advertising scheme, but not for any other schemes. All Pareto efficient co-op advertising schemes are associated with a single local advertising level and a single brand name investment level, but with variable sharing policies of advertising expenses. The best Pareto efficient advertising scheme is obtained taking members' risk attitudes into account. Utilizing the Nash bargaining model, we discuss two situations that (a) both members are risk averse, and (b) both members are risk neutral. Our results are consistent with the bargaining literature.     

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

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.     

Modelling Cooperative Advertising Decisions in Franchising

Advertising fee decisions in franchise systems are a frequent source of conflict between franchisors and franchisees. Such disagreements persist because the win-win potential of vertical cooperative advertising is not well appreciated. Our paper introduces a formal normative approach for analyzing, understanding and subsequently making these vertical cooperative advertising decisions within a franchising context in a manner that results in optimal system-wide returns. The model demonstrates that cooperative determination of franchisor's and franchisee's advertising contributions may yield superior payoffs for both exchange partners than the total payoff if the franchisor and franchisee seek to optimize their individual objective functions. Three types of models are developed and evaluated (i.e. deterministic, stochastic and under conditions of differing perceptions of the sales response functions to advertising). Conclusions hold under all three model variants. Industry implications are also presented.     

A game theoretic approach to coordinate pricing and vertical co-op advertising in manufacturer-retailer supply chains

Vertical cooperative (co-op) advertising is a marketing strategy in which the retailer runs local advertising and the manufacturer pays for a portion of its entire costs. This paper considers vertical co-op advertising along with pricing decisions in a supply chain; this consists of one manufacturer and one retailer where demand is influenced by both price and advertisement. Four game-theoretic models are established in order to study the effect of supply chain power balance on the optimal decisions of supply chain members. Comparisons and insights are developed. These embrace three non-cooperative games including Nash, Stackelberg-manufacturer and Stackelberg-retailer, and one cooperative game. In the latter case, both the manufacturer and the retailer reach the highest profit level; subsequently, the feasibility of bargaining game is discussed in a bid to determine a scheme to share the extra joint profit.     

Supply chain coordination through integration of innovation effort and advertising support

This study integrates firms’ innovation and advertising decisions in a two-echelon supply chain, where a monopoly manufacturer sells products to ultimate consumers through an autonomous retailer. Considering that both innovation and advertising contribute to the product demand, we first investigate the optimal equilibriums of channel members under two different game structures: the non-cooperative and cooperative. In the non-cooperative structure, the manufacturer controls the innovation effort and wholesale price while the retailer controls the advertising rate and retail pricing. In the cooperative structure, the manufacturer agrees to share part of retailer’s advertising expenditure. We find that both the optimal operation and marketing decisions are sensitive to effects of innovation and advertising on demand as well as the manufacturer’s cost reduction coefficient due to innovation. Further, we find that the manufacturer always prefers cooperation. Meanwhile, only when the firms’ investments significantly contribute to the market mechanism, does the retailer have incentive to implement a cooperative program. In addition, we further propose a new two-way subsidy policy to coordinate channel members’ business functions.     

Advertising coordination games of a manufacturer and a retailer while introducing a new product

Two kinds of vertical cooperative advertising program are considered in a distribution channel constituted by a manufacturer and a retailer, where the manufacturer pays part of the retailer’s advertising costs. In the first participation scheme, the manufacturer chooses his/her advertising participation rate in the retailer’s advertising effort and then each player determines the advertising effort that maximizes his/her profit. In the second scheme, the retailer chooses the manufacturer’s participation rate and then the manufacturer determines the advertising efforts of both players with the objective of maximizing the manufacturer’s profit. Each participation scheme corresponds to a special Stackelberg game: the manufacturer is the leader of the first, while the retailer is the leader of the second. The Stackelberg equilibrium advertising efforts and participation rate in both games are provided. Then the equilibrium strategies of the two players in the analyzed scenarios are compared with the Nash equilibrium in the competitive framework. Finally, the conditions which suggest a special kind of agreement to a player are analyzed. This work was supported by the Italian Ministry of University and Research and the University of Padua.     

不同决策模式下的双渠道供应链合作广告博弈分析

本文研究了双渠道供应链中非合作广告模式、合作广告模式和战略联盟模式下的合作广告问题,给出了不同决策模式下的均衡解。对比分析发现:战略联盟模式中品牌广告和零售商广告投入水平最高,网络广告投入水平最低且零售渠道的产品需求最高。合作广告模式和战略联盟模式中的系统收益与广告比率负相关,与产品网络适应度正相关。     

Statistical Decision Analysis of Cooperative Advertising Ventures

Statistical analysis is used for a decision situation involving a vertical cooperative advertising venture. A product is sold from a company to an independent agent, in which a portion of the agent advertising expense is paid by the company. A typical example is the company-to-agent relation between a soft drink manufacturer and its bottlers (distributors). The object of the analysis is to determine an optimal setting of the product price between company and agent, the advertising subsidy paid to the agent by the company and the advertising level of the agent. It is demonstrated via a real-world study that these decisions may be improved by use of statistical analysis.     

广告分担、价格折扣与供应链的纵向合作广告

研究了生产商和零售商的纵向合作广告问题。分别在广告分担和价格折扣策略下，探讨了双方的均衡结果和利润。当生产商的边际利润较小时，生产商的最优决策是不采取任何一种策略。当生产商的边际利润达到一定范围时，广告分担策略是双方共同的最优选择。而无论在什么样的条件内，价格折扣策略都不会使双方同时满意。为了增加双方的收益，供应链成员应该在广告上集成决策。最后给出了系统集成的可行最优解的范围和Nash讨价还价解。     

Coordinating advertising and pricing in a manufacturer–retailer channel

Cooperative advertising is a practice that a manufacturer pays retailers a portion of the local advertising cost in order to induce sales. Cooperative advertising plays a significant role in marketing programs of channel members. Nevertheless, most studies to date on cooperative advertising have assumed that the market demand is only influenced by advertising expenditures but not by retail price. This paper addresses channel coordination by seeking optimal cooperative advertising strategies and equilibrium pricing in a two-member distribution channel. We establish and compare two models: a non-cooperative, leader–follower game and a cooperative game. We develop propositions and insights from the comparison of these models. The cooperative model achieves better coordination by generating higher channel-wide profits than the non-cooperative model with these features: (a) the retailer price is lower to consumers; and (b) the advertising efforts are higher for all channel members. We identify the feasible solutions to a bargaining problem where the channel members can determine how to divide the extra profits.     

Game theoretic analysis of pricing and vertical cooperative advertising of a retailer-duopoly with a common manufacturer

This paper considers competition of duopolistic retailers, who sell substitutable products supplied by a single manufacturer offering a vertical cooperative advertising program. The price-dependent component of the demand function is derived from the consumers’ utility function in order to avoid logically inconsistent results. Additionally, each supply chain member can increase the costumers’ demand by advertising. By means of game theory, we get the following results: (a) Retailer competition harms all players, but is beneficial to the consumers. (b) Stronger competition is followed by less advertising. (c) Channel-leadership is not always advantageous to the manufacturer, and—likewise—retailers can also be better off when accepting followership. However, as our analysis shows, the increased complexity of the model under consideration reaches the limits of an analytical solution. Therefore, we give a brief outlook on non-nalytical solution methods for Nash and Stackelberg games, that could be used in future research, in the end of our paper.     

Delayed effects of cooperative advertising in goodwill dynamics

This paper proposes a tool to control cooperative advertising which increases the goodwill of companies operating in a competitive market. We introduce the lag between advertising exposure and customer reaction in the goodwill dynamics evolved à la Nerlove–Arrow. As a result, we obtain a cooperative differential game with immediate and delayed effects of control variables for which we investigate the optimal solution. We examine the role the pre-coalition programmes and the length of delayed response in generating goodwill.     

风险中性零售商的合作广告策略与订货模型

考虑了由一个制造商与一个零售商构成的单期二阶段供应链是否进行合作广告的博弈问题.面对市场需求的不确定性,零售商从制造商处订购报童类型产品销售给消费者,零售商具有风险中性的行为特征.通过不合作广告与合作广告两种情形,制造商与零售商进Stackelberg主从博弈,得到了均衡解,比较后发现,合作广告下的最优解及利润总是优于不合作广告下的最优解和利润,告诉了上下游企业采用合作广告的广告策略.最后,通过数值算例,给出了需求敏感系数对最优决策的影响,同时也论证了有关结论.     

Alternative statistical regression studies of the effects of Joint and Service Specific advertising on military recruitment

Three different regression approaches use a large database developed by the Wharton Center for Applied Research (WCAR) to study the effects of Joint versus Service Specific advertising on military recruitment. (Here ‘Joint’ refers to advertising designed to serve recruitment for all four services simultaneously. Service Specific refers to advertising administered separately by each of the four services.) These regression approaches and the data and models are examined with special reference to US Army recruitment. The WCAR study led to a recommendation to replace Service Specific with Joint advertising. This recommendation was called into question by the RAND Corporation in its study that used a different regression approach. A third study that combines regressions with data envelopment analysis (DEA) is presented in this paper. This study utilizes recently developed methods based on DEA which, when incorporated in the regression, make it possible to distinguish between efficient and inefficient performances. The resulting regression yields results that show Joint advertising to be not only less efficient but also to attract potential recruits from the Army to other services. Implications for further research are set forth, which can also cast light on commercial practice by regarding Joint as a type of ‘category advertising’ and Service Specific as a type of ‘brand advertising’.     

制造商与渠道势力不对称零售商的合作广告模型研究

研究制造商与渠道势力不对称零售商的合作广告问题.在需求不确定的情况下,建立了制造商和零售商的分散式与集中式系统下的合作广告模型,得到了不同系统下制造商和强势零售商的最优合作广告策略、强势零售商和边缘零售商的最优订货策略,及他们的最优期望利润.通过对不同系统下均衡结果的比较分析,证明了分散式系统存在不协调.设计了实现渠道协调的联合契约,指出分散式协调系统下的联合契约不唯一,契约参数两两正相关,广告补贴率、产品批发价格和回购价格是制造商和强势零售商力量平衡的焦点.     

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.     

Periodicity of pricing and marketing efforts in a distribution channel

Most research about cooperative (coop) advertising programs in channels relies on the assumption that manufacturers and retailers decide of pricing and marketing efforts simultaneously. This paper evaluates this central assumption and investigates the optimal periodicity (sequence of move) of pricing and marketing efforts (ME) decisions for a distribution channel. We develop a game theoretic model that accounts for pricing at each level of the channel, for the manufacturer’s ME mix strategies (a direct ME to consumers and coop advertising program offered to the retailer) and the retailer’s ME as well. We obtain solutions for a bilateral channel under different vertical interaction scenarios; when the channel is led by the manufacturer, the retailer or when channel members decide simultaneously of each of their marketing mix decisions (vertical Nash). We compare the effect of pricing and ME decision periodicity on outputs for each channel member. The main findings suggest that simultaneous decision-making of pricing and ME is optimal only for high enough levels of the manufacturer’s ME effects. For very highly effective marketing efforts, sequential play of pricing and ME allows channel members to implement equilibrium strategies and achieve maximum profits that would not be achieved with simultaneous decision-making. This highlights the importance of relaxing the simultaneous play assumption of pricing and ME in a distribution channel.     

Coordination of cooperative advertising in a two-level supply chain when manufacturer offers discount

We studied the coordination of cooperative advertisement in a manufacturer–retailer supply chain when the manufacturer offers price deductions to customers. With a price sensitive market, the expected demand with cooperative advertising and price deduction is demonstrated. When the manufacturer is a leader, we obtained the optimal national brand name investment, local advertisement and associated manufacturer’s allowance with any given price deduction. When the manufacturer offers more price deduction to customers, the retailer will increase local advertisement if the manufacturer provides the same portion of the local advertising allowance. We obtained the necessary and sufficient condition for the price deduction to ensure an increase of manufacturer’s profit, and a search procedure for determining such an optimal price deduction is provided as well. When the manufacturer and retailer are partners, we obtained the optimal national brand name investment and local advertisement. For any given price deduction, the total profit for the supply chain with cooperative scheme is always higher than that with the non-cooperative scheme. When price elasticity of demand is larger than one, the resulting closed form optimal price deduction with partnership is also obtained. To increase profits for both parties in a supply chain, we recommend that coordination in local and national cooperative advertising with a partnership relationship between manufacturer and retailer is the best solution. The bargaining results show how to share the profit gain between the manufacturer and the retailer, and determine the associated pricing and advertising policies for both parties.     

A Game-Theoretic Analysis for Coordinating Cooperative Advertising in a Supply Chain

In this paper, we investigate the coordination of cooperative advertising decisions in a supply chain with one manufacturer and one retailer. The manufacturer and the retailer invest in national and local advertising, respectively. The manufacturer also agrees to share part of the total local-advertising costs with the retailer. The model is analyzed using game theory. We also compare the results of our analysis with similar results from the literature developed for cooperative advertising.     

Using several advertising media in a homogeneous market

We propose a variety of models to represent the joint effect of several advertising media on the demand for a product in a homogeneous market, and discuss the associated profit maximization problems. An advertising productivity function represents the combination of several media and, together with demand and advertising cost functions, determines the features of the associated profit problem. We distinguish between additive and nonadditive advertising productivity functions, then between smooth and nonsmooth ones. The demand function may either be linear or not. We observe how different models may exhibit either synergy or interference effects. In some cases we obtain explicit optimal solutions.