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Cooperative Advertising and Pricing in a Dynamic Stochastic Supply Chain: Feedback Stackelberg Strategies


Xiuli He


University of North Carolina at Charlotte

Ashutosh Prasad


University of Texas at Dallas - Naveen Jindal School of Management

Suresh Sethi


University of Texas at Dallas - Naveen Jindal School of Management


Production and Operations Management, Vol. 18, No. 1, pp. 78-94, 2009

Abstract:     
Cooperative (co-op) advertising is an important instrument for aligning manufacturer and retailer decisions in supply chains. In this, the manufacturer announces a co-op advertising policy, i.e., a participation rate that specifies the percentage of the retailer's advertising expenditure that it will provide. In addition, it also announces the wholesale price. In response, the retailer chooses its optimal advertising and pricing policies. We model this supply chain problem as a stochastic Stackelberg differential game whose dynamics follows Sethi's stochastic sales-advertising model. We obtain the condition when offering co-op advertising is optimal. We provide in feedback form the optimal advertising and pricing policies for the manufacturer and the retailer. We contrast the results with the advertising and price decisions of the vertically integrated channel, and suggest a method for coordinating the channel.

Number of Pages in PDF File: 17

Keywords: Co-op Advertising, Cooperative advertising, Sales-Advertising Dynamics, Differential Games, Sethi Model, Distribution Channel, Stackelberg equilibrium, Feedback Stackelberg strategy, Sales-advertising model, advertising participation rate, optimal advertising, optimal pricing

JEL Classification: C61, M31, M37, M31, M00, C71, C73

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Date posted: December 11, 2007 ; Last revised: March 12, 2009

Suggested Citation

He, Xiuli and Prasad, Ashutosh and Sethi, Suresh, Cooperative Advertising and Pricing in a Dynamic Stochastic Supply Chain: Feedback Stackelberg Strategies. Production and Operations Management, Vol. 18, No. 1, pp. 78-94, 2009. Available at SSRN: http://ssrn.com/abstract=1069063

Contact Information

Xiuli He (Contact Author)
University of North Carolina at Charlotte ( email )
9201 University City Boulevard
Charlotte, NC 28223
United States
Ashutosh Prasad
University of Texas at Dallas - Naveen Jindal School of Management ( email )
800 W Campbell Road
Richardson, TX 75080
United States
Suresh Sethi
University of Texas at Dallas - Naveen Jindal School of Management ( email )
800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States
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