Benefits of bilateral participation in cooperative advertising

Unilateral participation in cooperative (co-op) advertising is popular in practice, and has been studied extensively in the literature. In this article, however, we show that this method is generally not able to coordinate the distribution channel. Instead, we propose a bilateral participation co-op advertisement system for a one-manufacturer, multiretailer distribution channel, where the manufacturer’s national advertising expense is shared by the retailers, and show that the bilateral participation system is capable of coordinating the distribution channel under a very general channel structure and sales response function that can lead to a Pareto improvement over any unilateral participation system. The benefits of adopting bilateral participation over unilateral participation in co-op advertising are then quantified under a commonly used additive sales response function with considerations of the scaling effects of the number of retailers and the stealing/spillover effects among retailers. Finally, we examine cases in which channel members’ participation rates and pricing are endogenously determined. In these cases, bilateral participation no longer coordinates the channel; nonetheless, it leads to significantly higher channel profit than does unilateral participation.