National Advertising and Cooperation in a Manufacturer-Two-Retailers Channel

Abstract

We consider a supply channel composed of one manufacturer and two symmetric retailers. Three cases are studied. The non-cooperation case is a leader-follower relationship. The manufacturer determines his spending in national advertising and the wholesale price. Then, retailers determine non-cooperatively the price for consumers. In the partial-cooperation case, retailers decide jointly for the price. In the full-cooperation case, all members of the channel cooperate by maximizing a joint profit function. Interestingly, partial-cooperation reduces the profits of retailers with respect to non-cooperation, when the degree of substituability between the two products proposed by retailers is low. Because of symmetry, this also implies that the total profit of retailers may decrease with partial-cooperation. Thus, when the degree of substituability between products is low, it is in the interest of retailers to set their prices non-cooperatively. We propose a cooperative implementable contract between all channel members, which shares the extra-profit due to full-cooperation. We propose a new and unusual evaluation of consumers’ surplus which positively depends not only on the price-demand function but also on the spending in national advertising. Partial-cooperation is always the worst case for the manufacturer, the whole channel, consumers’ surplus and social welfare, while full-cooperation is the best case. Keywords: Game theory; National advertising; Partial-cooperation; Full-cooperation; Welfare JEL Classifications: C70; D60; M30