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.