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A Feedback Stackelberg Game of Cooperative Advertising in a Durable Goods Oligopoly

In: Dynamic Games in Economics

Author

Listed:
  • Anshuman Chutani

    (Ecole Nationale Superieure des Mines de Saint-Etienne)

  • Suresh P. Sethi

    (The University of Texas at Dallas)

Abstract

Cooperative advertising is an important mechanism used by manufacturers to influence retailers’ promotional decisions. In a typical arrangement, the manufacturer agrees to reimburse a fraction of a retailer’s advertising cost, known as the subsidy rate. We consider a case of new product adoption of a durable good with retail oligopoly, in which a manufacturer sells through a number of independent and competing retailers. We model the problem as a Stackelberg differential game with the manufacturer as the leader and the retailers as followers. The manufacturer announces his subsidy rates for the retailers, and the retailers in response play a Nash differential game to increase their cumulative sales and choose their optimal advertising efforts. We obtain feedback Stackelberg strategies consisting of manufacturer’s subsidy rates and retailers’ optimal advertising efforts. We obtain the conditions under which it is optimal for the manufacturer to not offer any advertising subsidy and study the role of retail competition on the manufacturer’s subsidy rates decisions. For a special case of two retailers, using a linear demand formulation, we present managerial insights on issues such as: dependence of subsidy rates on key model parameters, impact on channel profits and channel coordination, and finally, a case of an anti-discrimination legislation which restricts the manufacturer to offer equal subsidy rates to the two retailers.

Suggested Citation

  • Anshuman Chutani & Suresh P. Sethi, 2014. "A Feedback Stackelberg Game of Cooperative Advertising in a Durable Goods Oligopoly," Dynamic Modeling and Econometrics in Economics and Finance, in: Josef Haunschmied & Vladimir M. Veliov & Stefan Wrzaczek (ed.), Dynamic Games in Economics, edition 127, pages 89-114, Springer.
    • Handle: RePEc:spr:dymchp:978-3-642-54248-0_5
    DOI: 10.1007/978-3-642-54248-0_5
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    Citations

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    Cited by:

    1. Karray, Salma & Martín-Herrán, Guiomar & Zaccour, Georges, 2017. "Assessing the profitability of cooperative advertising programs in competing channels," International Journal of Production Economics, Elsevier, vol. 187(C), pages 142-158.
    2. Qinglong Gou & Juzhi Zhang & Juan Zhang & Liang Liang, 2017. "Nash Equilibria of Co-Operative Advertising Programs with Advertising Threshold Effects," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 981-1004, July.
    3. Karray, Salma & Martín-Herrán, Guiomar & Sigué, Simon-Pierre, 2017. "Cooperative advertising for competing manufacturers: The impact of long-term promotional effects," International Journal of Production Economics, Elsevier, vol. 184(C), pages 21-32.
    4. Chutani, Anshuman & Sethi, Suresh P., 2018. "Dynamic cooperative advertising under manufacturer and retailer level competition," European Journal of Operational Research, Elsevier, vol. 268(2), pages 635-652.
    5. Dridi, Dhouha & Ben Youssef, Slim, 2015. "Local advertising externalities and cooperation in one manufacturer-two retailers channel," MPRA Paper 62705, University Library of Munich, Germany.
    6. Jørgensen, Steffen & Zaccour, Georges, 2014. "A survey of game-theoretic models of cooperative advertising," European Journal of Operational Research, Elsevier, vol. 237(1), pages 1-14.

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