Cooperative advertising in competing supply chains and the long-term effects of retail advertising

Abstract

The profitability of cooperative advertising (CA) programs is analyzed in a supply chain where competing manufacturers sell their products through competing retailers. We study a two-period game-theoretic model that accounts for positive and negative long-term effects of retail advertising on consumer preferences. We obtain closed-form equilibria in two particular cases where either the stores or the products are perfectly differentiated. For the general case where both products and stores can be substitutable, we develop a numerical algorithm to find the equilibrium. We compare the equilibria obtained in games where CA is offered and where it is not. The results show that the second-period effects of first-period retail advertising and the levels of substitutability between products and between retailers all play a key role in assessing the profitability of CA programs. CA only benefits manufacturers when store and product competition are both low, or when retailers are highly differentiated. However, in most cases, retailers do not find such programs profitable except when product substitutability levels are high while store competition is low. Finally, CA can only be win-win arrangements for manufacturers and retailers when the level of store differentiation is very high, the products are moderately substitutable, and first-period retail advertising has a substantial positive impact on second-period sales. The manufacturers' cooperative advertising support rates increase with the second-period effects of retail advertising.

Managing advertising investments in marketing channels

“…In particular, retailer advertising always positively impacts the first-period sales (β ∈ (0, 1)), but its second-period effects can be either positive or negative (δ ∈ ( − 1, 1)). This is in line with works which consider that while retailer advertising mainly aims at boosting short-term sales, its long-term effects are still controversial due to the fact that it can either damage the manufacturer's brand image or create stockpiling for certain products, resulting in decreased post-advertising sales (e.g., Jørgensen et al, 2003;Herrington and Dempsey, 2005;Karray et al, 2017Karray et al, , 2021Martín-Herrán and Sigué, 2017a;He et al, 2019;Huang and Bai, 2021). On the other hand, manufacturer advertising is known to contribute to building a lasting brand image that decays over time (e.g., Aust and Buscher, 2014;Huang and Bai, 2021).…”

“…On the downside, relying on retailer advertising via a cooperative advertising program generates some risks for manufacturers. Retail advertising activities primarily aim at stimulating immediate sales, but may also have positive or negative effects on long-term sales due to brand image deterioration or stockpiling for certain types of products (Herrington and Dempsey, 2005;Karray et al, 2021;Martín-Herrán et al, 2010;Martín-Herrán and Sigué, 2017a;He et al, 2019;Huang and Bai, 2021). In a standard cooperative advertising program, while the manufacturer sets some guidelines about the type of advertising activities that qualify for reimbursement, the decision to participate or not to participate in such a program rests with the retailer who also controls many critical aspects of his advertising activities.…”

An integrative framework of cooperative advertising with reference price effects

“…A distinctive feature of this model is that consumers use the first-period retail price as the second-period reference price to gauge whether or not they get better deals. Otherwise, similar to previous two-period games in channel literature, first-period advertising may have positive, negative or no effect on second-period sales (Karray et al, 2017(Karray et al, , 2020(Karray et al, , 2021; Martín-Herrán and Sigué, 2017a) .…”

“…Recently published two-period cooperative advertising models, such as Martín-Herrán and Sigué (2017a), Karray et al (2017Karray et al ( , 2021Karray et al ( , 2022, offer an alternative to differential game models. However, they only study the long-term effects of advertising in different channel structures and overlook reference price effects.…”

Cooperative advertising and coordination in a supply chain: the role of Nash bargaining fairness concerns

“…As an efficient cost-sharing mechanism, the subsidy program affects stakeholders' advertising investments and incomes. Given the program's importance in business operations, game theory has been employed to examine its decision process [18,30].…”