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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

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

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.

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

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: https://ssrn.com/abstract=1069063

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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