Cooperative advertising contract design in a supply chain with an offline showroom under asymmetric information

We investigate an online retailer’s cooperative advertising contract design where an offline showroom advertises to attract consumers to evaluate the product offline and buy it online. Considering the impact of advertising effort, retail price of the product and the probability that the product fits consumers’ needs on demands, we design the optimal cooperative advertising contract under symmetric and asymmetric information. Then, we identify the impact of important factors on contract design and profits of supply chain members. We find that under asymmetric information, the online retailer can adopt two different contract strategies, in one of which information asymmetry does not reduce profit of the online retailer and efficiency of the whole supply chain. The above result suggests the online retailer that choosing the optimal strategy can sometimes combat the ill-effect of information asymmetry. We also find that the impact of unit return handling cost on the optimal contract depends on the balance of the direct effect and the spillover effect of advertising. In some conditions, supply chain members obtain lower profits as offline potential demand increases. Besides, the spillover effect does not always increase supply chain members’ profits.