We consider a marketing channel with a single manufacturer and a single retailer, where both advertising and quality improvement contribute to the build-up of goodwill. In a non-coop scenario, the retailer controls the price and the advertising while the manufacturer controls the quality. Although improving quality contributes positively to goodwill, it also increases the production cost, reducing the manufacturer's profit. In a coop scenario, the manufacturer supports the retailer's advertising while abandoning the quality improvement strategy. We investigate the conditions under which a coop program is beneficial when such a trade-off occurs. Our results show that a coop program is always successful if operational inefficiency is high. When the operational inefficiency and the quality effectiveness are both low, a coop program only benefits the retailer. In the ideal situation of high quality effectiveness and low operational inefficiency, both players prefer to play a non-coop game.
Published September 2009 , 21 pages