The paper deals with a problem of determining optimal advertising expenditures in a two-member channel of distribution in which the manufacturer invests in national advertising and reimburse the retailer part of his local advertising costs. The problem is studied as a dynamic Stackelberg game and we consider three scenarios. In the first two, the manufacturer supports the retailer's local advertising, in the last one he does not. The first two scenarios differ by the assumption on the manufacturer's objective. In one case, the manufacturer maximizes his individual profits whereas in the second the manufacturer wishes to design an incentive strategy such that the retailer will act so as to maximize the overall channel profits. The incentive lies in the manufacturer support of retailer's local advertising. We compare the outcomes of the three equilibria in terms of equilibrium advertising levels and optimal profit values. Our results indicate that it pays for the manufacturer to support the retailer's local advertising costs and that cooperative advertising is a mutually beneficial channel arrangement.
Published May 1998 , 19 pages