The paper is concerned with sustainable cooperation in a vertical two-member channel of distribution over an infinite planning horizon. Sustainable intertemporal cooperation means that individual rationality must be satisfied in every subgame starting along the cooperative trajectory. Optimal pricing and advertising strategies are identified within a differential game framework in which the retailer's stock of advertising goodwill acts as the variable describing the current state of the system. Strategies are developed for both uncoordinated and coordinated situations. The former acts as disagreement strategies in the cooperative game. The advertising strategies are stationary feedback strategies, that is, the current advertising rates are determined as functions of the current level of the goodwill stock.
Published September 1996 , 35 pages