A game theoretic approach to coordinate pricing and vertical co‐op advertising in manufacturer–retailer supply chains

Vertical cooperative (co‐op) advertising is a marketing strategy in which the retailer runs local advertising and the manufacturer pays for a portion of its entire costs. This paper considers vertical co‐op advertising along with pricing decisions in a supply chain; this consists of one manufacturer and one retailer where demand is influenced by both price and advertisement. Four game‐theoretic models are established in order to study the effect of supply chain power balance on the optimal decisions of supply chain members. Comparisons and insights are developed. These embrace three non‐cooperative games including Nash, Stackelberg‐manufacturer and Stackelberg‐retailer, and one cooperative game. In the latter case, both the manufacturer and the retailer reach the highest profit level; subsequently, the feasibility of bargaining game is discussed in a bid to determine a scheme to share the extra joint profit.