Modelling cooperative advertising decisions in franchising

Modelling cooperative advertising decisions in franchising

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Article ID: iaor19971281
Country: United Kingdom
Volume: 47
Issue: 9
Start Page Number: 1120
End Page Number: 1136
Publication Date: Sep 1996
Journal: Journal of the Operational Research Society
Authors: ,
Keywords: franchising
Abstract:

Advertising fee decisions in franchise systems are a frequent source of conflict between franchisors and franchisees. Such disagreements persist because the win-win potential of vertical cooperative advertising is not well appreciated. This paper introduces a formal normative approach for analyzing, understanding and subsequently making these vertical cooperative advertising decisions within a franchising context in a manner that results in optimal system-wide returns. The model demonstrates that cooperative determination of franchisor’s and franchisee’s advertising contributions may yield superior payoffs for both exchange partners than the total payoff if the franchisor and franchisee seek to optimize their individual objective functions. Three types of models are developed and evaluated (i.e. deterministic, stochastic and under conditions of differing perceptions of the sales response functions to advertising). Conclusions hold under all three model variants. Industry implications are also presented.

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