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This research assesses the effects of cooperative (coop) advertising in a channel with competing retailers considering both advertising and pricing as decision variables. We develop a game-theoretic model and provide equilibrium solutions for two games. In Game 1, the manufacturer and the retailers do not use cooperative advertising (status quo); and in Game 2, coop advertising is implemented. We also obtain optimal solutions for the case where the channel is coordinated. Contrary to the results provided for one-manufacturer, one-retailer channels, we find that coop advertising may not be profitable for the retailers or for the channel, especially when the market is characterised by low levels of price competition and high advertising competition between retailers. Although it benefits the manufacturer, the total effect of cooperative advertising on the channel profit might be negative under such conditions. The results also show that coop advertising stimulates retailers' spending but may result in lower advertising expenditures than for a fully coordinated channel. Finally, when coop advertising benefits the entire channel, it does not fully achieve results from vertical integration.

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We propose a model of retail promotions for competitive distribution channels and investigate whether cooperative advertising programs are profitable for such channels. While previous studies showed that coop programs increase total channel profits in bilateral monopolies, no evidence of such a result has been provided for channels where competition is present at the manufacturing and the retailing levels. In this paper, we consider a distribution channel formed by two manufacturers and two retailers and propose a model that accounts for brand and store substitution effects generated by the retailer's promotional efforts. The efficiency of the coop plan is investigated by comparing equilibria of four non-cooperative games; one where manufacturers do not offer any promotional support to the retailers, one where manufacturers do offer such a support and two scenarios where in turn only one manufacturer is offering such program. We show that when competition is introduced, coop ad programs may be due to a prisonner's dilemma situation for the manufacturers. The benefit for retailers and consumers is also assessed.