Cooperative advertising in a marketing channel

This paper examines dynamic advertising and promotion strategies in a marketing channel where the retailer promotes the manufacturer product and the manufacturer spends on advertising to build a stock of goodwill. We assume that sales depend on goodwill and promotion activities and that there are decreasing marginal returns to goodwill. Two scenarios are studied. First, the manufacturer and retailer determine noncooperatively their respective strategies. Second, the game is played à la Stackelberg with the manufacturer as the leader who supports partially the cost of the promotion activities of the retailer. In both cases, stationary Markovian strategies are characterized. These scenarios are examined also in the absence of decreasing marginal effect of goodwill on sales. The results show that, whether or not the goodwill stock has a decreasing marginal effect on sales, the cooperative advertising program is a coordinating mechanism in the marketing channel, i.e., both players receive higher payoffs.