Coordinating a supply chain with negative effect of retailer’s local promotion on goodwill and reference price

This paper investigates a distribution channel consisting of a manufacturer and a retailer under a cooperative program, where the manufacturer determines the national advertising and quality improving effort, while the retailer decides the local promotion effort and may undertake parts of the costs of national advertising and quality improving of the manufacturer. It is assumed that the manufacturer’s national advertising and quality improving efforts positively affect the brand goodwill and reference price, whereas the retailer’s local promotion effort damages them. Three scenarios of the non‐cooperative and cooperative scenarios in the decentralized supply chain, and the centralized supply chain scenario, are analyzed. The corresponding equilibrium strategies and profits are obtained and compared, which shows that the cooperative program can achieve payoff‐Pareto‐improving, but cannot coordinate completely the supply chain. Furthermore, a revenue sharing contract combined with two‐subsidy policy is designed to coordinate the decentralized supply chain. Numerical simulation and sensitivity analysis of the coordinating results on the key system parameters are provided to verify the effectiveness of the contract, and some managerial insights are provided.