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Comarketing Alliances: Should You Contract on Actions or Outcomes?

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Author Info

  • Pavan Rao Chennamaneni

    ()
    (Department of Marketing, College of Business and Economics, University of Wisconsin-Whitewater, Whitewater, Wisconsin 53190)

  • Ramarao Desiraju

    ()
    (Department of Marketing, College of Business Administration, University of Central Florida, Orlando, Florida 32816)

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    Abstract

    Comarketing alliances often involve multiple partners, and a given partner's marketing efforts on behalf of the alliance can indirectly affect the demand of the other partners. Individual partners, however, can ignore the effects of such an externality and invest suboptimally to the detriment of the alliance. This paper examines the relative effectiveness of outcome- and action-based contracts in providing the alliance partners with the incentives to invest appropriately. We develop a mathematical model in which a focal firm (e.g., Sony) contracts with two partners (e.g., McDonald's and Old Navy) when each of these partners is privately informed about the impact of the alliance on its demand. Our analysis evaluates the strengths and weaknesses of outcome- (or output-) and action-based (or input-based) contracts in settings with varying levels of the demand externality. We find that when there is either no externality or a relatively weak positive externality, there is a strict preference for output-based contracts; that preference, however, is reversed with a sufficiently strong positive externality. This paper explains the underlying rationale for these findings. This paper was accepted by Preyas Desai, marketing.

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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1297
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 57 (2011)
    Issue (Month): 4 (April)
    Pages: 752-762

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    Handle: RePEc:inm:ormnsc:v:57:y:2011:i:4:p:752-762

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    Keywords: comarketing alliances; marketing externality; information asymmetry; input versus output monitoring;

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