Incentive mechanisms for price and advertising coordination in dynamic marketing channels

Abstract

This paper examines the issue of price and advertising coordination in bilateral monopolies from a dynamic perspective. Its main objectives are to design incentive mechanisms that the manufacturer can use in order to reduce double marginalization, and to investigate whether these mechanisms can be implemented by the manufacturer and accepted by the retailer. I consider a differential game where a manufacturer controls its wholesale price and its national advertising effort. The carry‐over effects of national advertising build up brand goodwill, which represents the model's state variable. The retailer controls the product's retail price and the local advertising effort, which affect consumer demand, in conjunction with the brand goodwill. I compute strategies and outcomes under three scenarios: (a) a fully coordinated scenario where channel members act as if the channel was vertically integrated; (b) a noncoordinated scenario, considered as the status quo, where the channel is decentralized; and (c) a scenario where incentive mechanisms are offered by the manufacturer. The main results indicate that two incentive mechanisms, namely, a retail‐price incentive and an advertising allowance offered by the manufacturer to the retailer can mitigate the double‐marginalization problem. With these incentives, and an appropriate choice of the channel‐coordinating wholesale price, the manufacturer can induce the retailer to fix its control variables at their channel‐coordinating levels without committing to implement the channel‐coordinating level of national advertising. Our results highlight the role of the channel‐coordinating wholesale price level on the Pareto‐optimality and the implementation of the incentives. I compute the values for the channel‐coordinating wholesale price that can be used as benchmarks by channel members in order to evaluate if the incentives should be implemented or not. I illustrate our results with numerical simulations indicating the channel‐coordinating wholesale price values where we observe an increase in both channel members' individual profits when the incentives are implemented (i.e., with respect to the status quo). These results can be explained by the decrease in retail price and the increase in local and national advertising. Both effects explain the increase in brand goodwill and demand when the incentives are implemented.

Cold chain investment and pricing decisions in a fresh food supply chain

“…(2019) took the effect of dynamic advertising into account and made a comprehensive comparison between the wholesale price contract and consignment contract in a two‐echelon manufacturer–retailer supply chain. In addition, cooperative advertisement is an important stream in the field of advertisement, which has been investigated in a large amount of research (Huang et al., 2002; Xie and Wei, 2009; Taboubi, 2019). We observed that the advertisement in these aforementioned studies is designed for the product itself and seldom has an emphasis on the products' preservation conditions, especially fresh food.…”

Incentive Decision for Supply Chain with Corporate Social Responsibility and Lag Effect

“…By substituting Equation (19) into the sorted differential equation, the solution of the equation group can be obtained as follows.…”

“…Based on this, we try to set a delay time for CSR of the manufacturing industry to represent the delay effect of corporate reputation. Considering the influence of advertising on supply chain operation strategy, Taboubi (2017) studied the price and advertising coordination in bilateral monopoly from a dynamic perspective [19]. Buratto et al (2019) coordinated the supply chain by studying the cooperative advertising plan and price discount mechanism [20].…”

Decisions of Closed-Loop Supply Chain Based on Recycling Effort and Differential Game

“…De Giovanni [8] considered consumers' environmental consciousness to discuss the closed-loop supply chain coordination. Taboubi [9] and Zhang et al [11] built the brand goodwill of the consumer to decide the price and the advertising effort. e key difference from theirs is that we focus on presenting optimal rent and recycling effort of the operator and designing an effective contract to improve channel performance.…”

“…For instance, OFO has reached a strategic cooperation of the "Urban Stock Cycle Sharing Plan" with Beijing Vanke, China Circular Economy Association, and Beijing Urban Renewable Resources Service Center. erefore, in this paper, considering consumers' experience, we assume that the more recycling effort, the higher consumers' satisfaction, then the more demand [8,9].…”