Cooperative advertising in a distribution channel with fairness concerns

Cooperative advertising in a distribution channel with fairness concerns

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Article ID: iaor20131651
Volume: 227
Issue: 2
Start Page Number: 401
End Page Number: 407
Publication Date: Jun 2013
Journal: European Journal of Operational Research
Authors: , , ,
Keywords: cooperation, Pareto principle
Abstract:

Cooperative (co‐op) advertising has been widely used in practice and employed as a strategy to improve the performance of a distribution channel. It is known from the existing models that co‐op advertising could not achieve the channel coordination (i.e., maximize the total channel profit). In this paper, we consider a distribution channel consisting of a single manufacturer and a single retailer, and investigate the effect of the retailer’s fairness concerns. Applying the equilibrium analysis, we obtain the following results: (1) Channel coordination can be achieved if the retailer has fairness concerns and model parameters satisfy certain conditions. (2) Although both channel members become better off with co‐op advertising if neither channel member has fairness concerns, we find situations where co‐op advertising brings detrimental effects to the retailer if the retailer has fairness concerns. (3) The retailer’s fairness concerns may increase or decrease the equilibrium participation rate, the equilibrium advertising effort, and the equilibrium profit of the manufacturer and the whole channel. (4) We identify the conditions under which the effectiveness of co‐op advertising can be improved or reduced by the retailer’s fairness concerns. As long as co‐op advertising can bring extra profit to the manufacturer, the retailer’s fairness concerns could improve the effectiveness of the co‐op advertising. (5) There exists a Pareto improvement for the profits of both the manufacturer and the retailer when a retailer without fairness concerns becomes fair‐minded.

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