Cooperative Advertising and Pricing in a Dynamic Stochastic Supply Chain: Feedback Stackelberg Strategies
Article first published online: 26 FEB 2009
© 2009 Production and Operations Management Society
Production and Operations Management
Volume 18, Issue 1, pages 78–94, January/February 2009
How to Cite
He, X., Prasad, A. and Sethi, S. P. (2009), Cooperative Advertising and Pricing in a Dynamic Stochastic Supply Chain: Feedback Stackelberg Strategies. Production and Operations Management, 18: 78–94. doi: 10.1111/j.1937-5956.2009.01006.x
- Issue published online: 26 FEB 2009
- Article first published online: 26 FEB 2009
- History: Received: October 2007; Accepted: April 2008, after 1 revision.
- Co-op advertising;
- sales-advertising dynamics;
- differential games;
- sethi model;
- distribution channel
Cooperative (co-op) advertising is an important instrument for aligning manufacturer and retailer decisions in supply chains. In this, the manufacturer announces a co-op advertising policy, i.e., a participation rate that specifies the percentage of the retailer's advertising expenditure that it will provide. In addition, it also announces the wholesale price. In response, the retailer chooses its optimal advertising and pricing policies. We model this supply chain problem as a stochastic Stackelberg differential game whose dynamics follows Sethi's stochastic sales-advertising model. We obtain the condition when offering co-op advertising is optimal for the manufacturer. We provide in feedback form the optimal advertising and pricing policies for the manufacturer and the retailer. We contrast the results with the advertising and price decisions of the vertically integrated channel, and suggest a method for coordinating the channel.