Cooperative Advertising in a Dynamic Retail Market Duopoly



Cooperative advertising is an important incentive offered by a manufacturer to influence retailers' promotional decisions. We analyze a retail market duopoly where one or both of the competing retailers are supported by the manufacturer in their advertising costs. We model the problem as a Stackelberg differential game in which the manufacturer announces his shares of advertising costs of the two retailers or his participation rates, and the retailers in response play a Nash differential game in choosing their optimal advertising efforts over time. We obtain feedback equilibrium solution consisting of the optimal advertising policies of the retailers and manufacturer's participation rates. We identify the key drivers that determine the optimal participation rates and, in particular, obtain the conditions under which the manufacturer will support one or both of the retailers. Finally, we analyze the extent to which cooperative advertising coordinates the channel.
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Prof.dr. S.L. van de Velde