Cooperative advertising in competing supply chains and the long-term effects of retail advertising

Abstract

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.