Comarketing Alliances: Should You Contract on Actions or Outcomes?
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.
Volume (Year): 57 (2011)
Issue (Month): 4 (April)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Khalil, F. & Lawarree, J., 1993.
"Input Versus Output Monitoring: Who Is the Residual Claimant?,"
Discussion Papers in Economics at the University of Washington
93-01, Department of Economics at the University of Washington.
- Khalil Fahad & Lawarree Jacques, 1995. "Input versus Output Monitoring: Who Is the Residual Claimant?," Journal of Economic Theory, Elsevier, vol. 66(1), pages 139-157, June.
- Khalil, F. & Lawarree, J., 1993. "Input Versus Output Monitoring: Who Is the Residual Claimant?," Working Papers 93-01, University of Washington, Department of Economics.
- Rajiv Lal, 1990. "Improving Channel Coordination Through Franchising," Marketing Science, INFORMS, vol. 9(4), pages 299-318.
- Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-361, March.
- Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
- Yupin Yang & Mengze Shi & Avi Goldfarb, 2009. "Estimating the Value of Brand Alliances in Professional Team Sports," Marketing Science, INFORMS, vol. 28(6), pages 1095-1111, 11-12.
- Preyas S. Desai & Kannan Srinivasan, 1995. "Demand Signalling Under Unobservable Effort in Franchising: Linear and Nonlinear Price Contracts," Management Science, INFORMS, vol. 41(10), pages 1608-1623, October.
- Demski, Joel S. & Sappington, David, 1984. "Optimal incentive contracts with multiple agents," Journal of Economic Theory, Elsevier, vol. 33(1), pages 152-171, June.
- Birendra K. Mishra & Ashutosh Prasad, 2004. "Centralized Pricing Versus Delegating Pricing to the Salesforce Under Information Asymmetry," Marketing Science, INFORMS, vol. 23(1), pages 21-27, January.
- Claudio Mezzetti, 2004. "Mechanism Design with Interdependent Valuations: Efficiency," Econometrica, Econometric Society, vol. 72(5), pages 1617-1626, 09.
- Eric Maskin & John G. Riley, 1984.
"Input Versus Output Incentive Schemes,"
UCLA Economics Working Papers
354, UCLA Department of Economics.
- Ramarao Desiraju, 2006. "Price versus Quantity Monitoring," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2361-2380, September.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:57:y:2011:i:4:p:752-762. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.