Modelling Cooperative Advertising Decisions in a Manufacturer-Distributor-Retailer Supply Chain Using Game Theory

Abstract

This work considers cooperative advertising decisions in a manufacturer-distributor-retailer supply chain using differential game theory. It considers the manufacturer as the Stackelberg leader. The distributor and retailer are the first and second followers, respectively. The work introduces the distributor into the traditional manufacturer-retailer channel through his direct involvement in advertising. This is achieved by incorporating the distributor into the non-stochastic Sethi's sales-advertising dynamics. This is used to model the awareness share dynamics in which the distributor and the retailer directly engage in advertising, while the manufacturer bypasses the distributor to subsidize only the retail advertising effort. The work derives the distributor and the retailer's advertising strategies for both when the subsidy is provided and when it is not provided. It also obtains the manufacturer's subsidy rate and the market awareness share for both when retail advertising is subsidized and when it is not subsidized. The work shows that with the provision of subsidy the resulting increase in retail advertising effort is larger than the reduction in the distributor's advertising commitment. It further shows that to avoid being shortchanged, each player should adopt only his optimal strategies.