Effectiveness of Coop Advertising Programs in Competitive Distribution Channels

Abstract

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.

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

“…The conditions above ensure the concavity of the function R. Next, we maximize R with respect to the first-period retailer's decisions, p 11 , p 21 , a 11 and a 21 , to get the optimal reaction functions, i.e., the first-period retail prices, p 11 and p 21 , and the retailer's promotional efforts, a 11 and a 21 , as functions of the first-period wholesale prices, w 11 and w 21 :…”

“…In the first period, the retailer chooses the retail prices, p 11 and p 21 and his promotional efforts, a 11 and a 21 , in order to maximize his total profits over the first and second periods:…”

“…It can be easily proved that the retailer's total profit function, R, is concave in his firstperiod decision variables, p 11 , p 21 , and a 11 , a 21 if and only if the following conditions are satisfied:…”

“…Taking into account the above conditions, and maximizing R with respect to the retailer's first-period decisions p 11 , p 21 , and a 11 , a 21 , we get the optimal retail prices and promotional efforts as functions of the first-period wholesale prices, w 11 and w 21 :…”

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

“…Furthermore, we assume that each retailer's local advertising has effect on the demand of his competitor (Aust and Buscher 2014c;Karray and Zaccour 2007):…”