An Analysis of Manufacturer-Retailer Supply Chain Coordination in Cooperative Advertising

Zhimin Huang and Susan X. Li
School of Business, Adelphi University, Garden City, NY 11530, e-mail: huang@adelphi.edu and susan@panther.adelphi.edu

Vijay Mahajan
McCombs School of Business, The University of Texas at Austin, Austin, TX 78712, and Indian School of Business, Gachibowli, Hyderabad 500 019, India, e-mail: vmahajan@mail.utexas.edu

ABSTRACT. In the literature of cooperative (co-op) advertising, the focus of the research is on a relationship in which a manufacturer is the leader and retailers are followers. This relationship implies the dominance of the manufacturer over retailers. Recent market trends have shown a shift in power from manufacturers to retailers. Retailers, as a result, may now possess equal or even greater power than a manufacturer in some instances when it comes to retailing. Based on this new market phenomenon, we intend to explore the role of co-op advertising in a manufacturer-retailer supply chain through brand name investments, local advertising expenditures, and sharing rules of advertising expenses. Two co-op advertising models are developed and compared. The first co-op advertising model is based on the traditional leader-follower relationship of a manufacturer and a retailer. The second model incorporates partnership into co-op advertising coordination. Business examples and managerial implications of the models have been discussed. A cooperative bargaining technique is utilized to implement the partnership co-op advertising model.

Subject Areas: Co-op Advertising, Coordination, Game Theory, and Supply Chains.