Coordinating a Supply Chain with Price and Advertisement Dependent Stochastic Demand

This paper investigates pricing and ordering as well as advertising coordination issues in a single-manufacturer single-retailer supply chain, where the manufacturer sells a newsvendor-type product through the retailer who faces a stochastic demand depending on both retail price and advertising expenditure. Under the assumption that the market demand has a multiplicative functional form, the Stackelberg and cooperative game models are developed, and the closed form solution to each model is provided as well. Comparisons and insights are presented. We show that a properly designed revenue-cost-sharing contract can achieve supply chain coordination and lead to a Pareto improving win-win situation for channel members. We also discuss the allocation of the extra joint profit according to individual supply chain members' risk preferences and negotiating powers.