The effectiveness of cooperative advertising programs is studied in a market where
two competing manufacturers deal with an exclusive retailer and two products. Two twostage
game theoretic models are developed to analyze the long-term effects of retailer’s
promotions, which can be positive or negative, on the effectiveness of cooperative advertising.
Closed-form equilibrium solutions are obtained and compared. We find that
the level of product substitutability and the sign and magnitude of the long-term effects
of retailer’s promotions on sales determine whether cooperative advertising should be
offered and accepted by the manufacturers and retailer. In particular, depending on
the level of product substitutability, cooperative advertising can benefit both the manufacturers
and retailer even when retailer’s promotions negatively affects future sales.
Conversely, it may not be in the interest of the manufacturers to offer cooperative advertising
when the products are fairly undifferentiated regardless of the nature of the long-term effects of promotions. Finally, the manufacturers and retailer may refuse to
respectively offer or participate in cooperative advertising programs that enhance total
channel profits.
