Group for Research in Decision Analysis

Channel coordination with quantity discounts and/or cooperative advertising

Salma Karray University of Ontario Institute of Technology, Canada

We assess the interactive effects of two commonly used channel coordination mechanisms (quantity discounts (QD) ad cooperative advertising (CA)). We use a game-theoretic model and solve four non-cooperative games. In the first game, neither quantity discounts nor cooperative advertising is implemented. Cooperative advertising alone is offered in the second game, while quantity discount alone is offered in the third game. In the fourth game, both quantity discount and cooperative advertising is implemented. We obtain analytical solutions and compare equilibrium results across games to assess the effectiveness of CA (QD) when implemented alone or jointly with QD (CA). The main findings suggest that the profitability of each of these mechanisms is affected by whether the other is implemented or not in the channel. For example, while cooperative advertising benefits the manufacturer when implemented alone, it can increase or decrease the manufacturer's profit when added to quantity discounts. Looking at which coordination mechanism is most effective when used alone, we find that both the manufacturer and the supply chain prefer quantity discounts to cooperative advertising. Finally, the retailer may not benefit from either one or both of these coordination mechanisms, especially if marketing efforts are not highly effective.

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