Quality improvement vs. advertising support: Which strategy works better for a manufacturer?

Quality improvement vs. advertising support: Which strategy works better for a manufacturer?

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Article ID: iaor20108529
Volume: 208
Issue: 2
Start Page Number: 119
End Page Number: 130
Publication Date: Jan 2011
Journal: European Journal of Operational Research
Authors:
Keywords: quality & reliability, advertising
Abstract:

We consider a marketing channel with a single manufacturer and a single retailer, where both advertising and quality improvement contribute to the build-up of goodwill. In a non-coop scenario, the retailer controls the advertising efforts while the manufacturer controls the quality improvements and wholesale price. Although improving quality positively contributes to goodwill, it also increases the production cost, thereby reducing the manufacturer’s profit. In a coop scenario, the manufacturer supports the retailer’s advertising while decreasing his investments in quality. We investigate the conditions under which a coop program is beneficial when such a trade-off occurs. Our results demonstrate that only when advertising significantly contributes to goodwill the manufacturer has an incentive to cooperate and a coop program turns out to be Pareto-improving. Conversely, the retailer is always better off with a coop program. Moreover, the channel is operational- and marketing-driven when quality effectiveness is high independent of advertising effectiveness or when both quality and advertising effectiveness are large. In all other cases, the channel is marketing-driven.

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