The profitability of cooperative advertising (CA) programs is analyzed in a supply chain
where competing manufacturers sell their products through competing retailers. We study a
two-period game-theoretic model that accounts for positive and negative long-term effects
of retail advertising on consumer preferences. We obtain closed-form equilibria in two particular
cases where either the stores or the products are perfectly differentiated. For the general
case where both products and stores can be substitutable, we develop a numerical
algorithm to find the equilibrium. We compare the equilibria obtained in games where CA is
offered and where it is not. The results show that the second-period effects of first-period
retail advertising and the levels of substitutability between products and between retailers
all play a key role in assessing the profitability of CA programs. CA only benefits manufacturers
when store and product competition are both low, or when retailers are highly differentiated.
However, in most cases, retailers do not find such programs profitable except
when product substitutability levels are high while store competition is low. Finally, CA can
only be win-win arrangements for manufacturers and retailers when the level of store differentiation
is very high, the products are moderately substitutable, and first-period retail
advertising has a substantial positive impact on second-period sales. The manufacturers’
cooperative advertising support rates increase with the second-period effects of retail
advertising.
