Cooperative Advertising and Pricing in a Supply Chain: A Bi-level Programming Approach

Nowadays, coordination between members in a supply chain has become very important and beneficial to channel members. Through cooperative advertising, manufacturers and retailers can jointly participate in promotional programs. This action not only reduces the cost of advertising, but also is important to create a link with local retailers in order to increase immediate sales at the retail level. In this article, the problem of cooperative advertising and pricing decisions in a multi-product manufacturer-retailer (oligopoly market) supply chain is investigated. Stackelberg game with leadership of the manufacturer is proposed to model the problem. In order to find optimal prices and advertising expenditure, the bi-level programming approach is implemented. Solutions for the first level are determined by a genetic algorithm and best responses of retailers to the generated solutions of the manufacturer are calculated by CPLEX. Finally, numerical experiments and sensitivity analysis are conducted in order to assess the efficiency of models and solution procedures. Results show that competition will lead to a lower retail price, which is preferable from the consumers’ point of view. Also, profit of the manufacturer and retailers will decrease if competition effect increases.