Cooperative Advertising in a Dynamic Retail Market Duopoly

Cooperative advertising is a key incentive offered by a manufacturer to influence retailers’ promotional decisions. We study cooperative advertising in a dynamic retail duopoly where a manufacturer sells his product through two competing retailers. 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 subsidy rates, and the retailers in response play a Nash differential game in choosing their optimal advertising efforts over time. We obtain the feedback equilibrium solution consisting of the optimal advertising policies of the retailers and manufacturer’s subsidy rates. We identify key drivers that influence the optimal subsidy rates and in particular, obtain the conditions under which the manufacturer will support one or both of the retailers. We analyze its impact on profits of channel members and the extent to which it can coordinate the channel. We investigate the case of an anti-discriminatory act which restricts the manufacturer to offer equal subsidy rates to the two retailers. Finally, we discuss two extensions: First, a retail oligopoly with any number of retailers, and second, the retail duopoly that also considers optimal wholesale and retail pricing decisions of the manufacturer and retailer, respectively.