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Game Theoretic Analysis of Pricing and Vertical Cooperative Advertising of a Retailer-Duopoly with a Common Manufacturer

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Vertical Cooperative Advertising in Supply Chain Management

Part of the book series: Contributions to Management Science ((MANAGEMENT SC.))

Abstract

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 customers’ 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) Retail competition harms all players, but is beneficial to the customers. (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.

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Notes

  1. 1.

    Cf. Bergen and John (1997): Cooperative advertising, p. 357, and Crimmins (1984): Cooperative advertising, p. 2.

  2. 2.

    Cf. Somers et al. (1990): Cooperative advertising expenditures, p. 36.

  3. 3.

    Cf. He et al. (2012): Co-op advertising, p. 74, and Nagler (2006): Cooperative advertising participation rates, pp. 91 et seq.

  4. 4.

    Cf. Dutta et al. (1995): Cooperative advertising contracts, p. 16, and Nagler (2006): Cooperative advertising participation rates, p. 96.

  5. 5.

    See Berger (1972): Vertical cooperative advertising.

  6. 6.

    See Huang and Li (2001): Co-op advertising models.

  7. 7.

    See Yue et al. (2006): Coordination of cooperative advertising, Xie and Neyret (2009): Co-op advertising, and Xie and Wei (2009): Coordinating advertising.

  8. 8.

    See Choi (1991): Price competition and Choi (1996): Price competition.

  9. 9.

    See Yang and Zhou (2006): Two-echelon supply chain models.

  10. 10.

    See Wu et al. (2012): Competitive pricing decisions.

  11. 11.

    See Zhang et al. (2012): Pricing decisions.

  12. 12.

    See Zhao et al. (2012b): Pricing decisions for substitutable products.

  13. 13.

    See Karray and Zaccour (2007): Effectiveness of coop advertising and He et al. (2011): Retail competition.

  14. 14.

    See Chutani and Sethi (2012b): Cooperative advertising, Ghadimi et al. (2013): Coordination of advertising, He et al. (2012): Co-op advertising, Wang et al. (2011): Cooperative advertising models, and Zhang and Xie (2012): Cooperative advertising with multiple retailers.

  15. 15.

    Cf. Wang et al. (2011): Cooperative advertising models, p. 1055.

  16. 16.

    See Ingene and Parry (2004): Mathematical models, chapter 11 (especially pp. 493–495), Ingene and Parry (2007): Bilateral monopoly, pp. 599 et seq. and its Technical Appendix, and Zhang et al. (2012): Pricing decisions, p. 524.

  17. 17.

    Cf. Ingene and Parry (2007): Bilateral monopoly, p. 599.

  18. 18.

    Cf. Kim and Staelin (1999): Manufacturer allowances, pp. 65 et seq., Karray and Zaccour (2006): Co-op advertising, p. 1010, and Xie and Wei (2009): Coordinating advertising, p. 787.

  19. 19.

    Cf. Karray and Zaccour (2007): Effectiveness of coop advertising, p. 155.

  20. 20.

    Cf. Yue et al. (2006): Coordination of cooperative advertising, p. 68, Xie and Neyret (2009): Co-op advertising, p. 787, and SeyedEsfahani et al. (2011): Vertical co-op advertising, p. 265.

  21. 21.

    See SeyedEsfahani et al. (2011): Vertical co-op advertising, pp. 266–269, and Aust and Buscher (2012): Vertical cooperative advertising, p. 477.

  22. 22.

    See Zhang et al. (2012): Pricing decisions, p. 528.

  23. 23.

    See Yang and Zhou (2006): Two-echelon supply chain models, p. 113, for a similar analysis at the basis of parameter ε.

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Acknowledgements

A slightly modified version of this work is also published in Aust and Buscher (2014b): Game theoretic analysis of pricing and vertical cooperative advertising of a retailer-duopoly with a common manufacturer. In: Central European Journal of Operations Research. http://dx.doi.org/10.1007/s10100-014-0338-7

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  1. Industrial Management, TU Dresden, Dresden, Germany

    Gerhard Aust (Chair)

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Aust, G. (2015). Game Theoretic Analysis of Pricing and Vertical Cooperative Advertising of a Retailer-Duopoly with a Common Manufacturer. In: Vertical Cooperative Advertising in Supply Chain Management. Contributions to Management Science. Springer, Cham. https://doi.org/10.1007/978-3-319-11626-6_5

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