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

Anshuman Chutani () and Suresh Sethi
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Anshuman Chutani: Ecole Nationale Superieure des Mines de Saint-Etienne

A chapter in Dynamic Games in Economics, 2014, pp 89-114 from Springer

Abstract: 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.

Keywords: Wholesale Price; Subsidy Rate; Advertising Effort; Channel Coordination; Cooperative Advertising (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/978-3-642-54248-0_5

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