Group for Research in Decision Analysis

A Differential Game of Retailer Promotions

Steffen Jørgensen

The paper identifies optimal dynamic marketing strategies in a channel of distribution. A number of (identical) retailers promote locally a manufacturer's brand in order to increase their short run sales. However, sustained and substantial retailer promotions damage the brand image seriously. The manufacturer advertises nationally to improve the brand image. Demand at the retail outlets are increased both by promotion and by the brand image. First we identify a noncooperative equilibrium of a differential game played with Markovian strategies. Next we study a cooperative game where the players make coordinated marketing decisions and address the question whether the manufacturer can design an incentive strategy such that the retailers will play their parts of the coordinated solution.