Modeling Dynamic Cooperative Advertising in a Decentralized Channel

Peter E. Ezimadu, Chukwuma R. Nwozo

This work deals with cooperative advertising in a manufacturer-retailer supply channel using differential game theory. It considers the manufacturer as the Stackelberg leader and the retailer as the follower. It incorporates the manufacturer’s advertising effort into Sethi’s sales-advertising dynamics, and considers its effect on the retail advertising effort, the awareness share, the players’ payoffs, and the channel payoff. These are achieved by considering two channel structures: a situation where retail advertising is subsidized, and a situation where it is not. In both situations, it obtains the Stackelberg equilibrium, which characterizes the effects of the manufacturer’s advertising effort, including the relationships between the manufacturer’s advertising effort and the retailer’s advertising effort. The work shows that the direct involvement of the manufacturer in advertising is worthwhile.