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
17 Pages Posted: 11 Dec 2007 Last revised: 12 Mar 2009
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.
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
Suggested Citation: Suggested Citation