Groupe d’études et de recherche en analyse des décisions

G-98-31

Equilibrium Pricing and Advertising Strategies in a Marketing Channel

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The paper is concerned with conflict and coordination in a two-member channel of distribution. We propose a differential game model that includes carry-over effects of advertising, expressed by a retailer-specific stock of advertising goodwill. Pricing and advertising strategies for both firms are identified under channel conflict as well as coordination. Dynamic advertising policies are designed as stationary Markov perfect strategies. Under certain symmetry assumptions, these strategies can be determined in closed-form, taking explicitly nonnegativity constraints on advertising rates into consideration. We establish a global result for the relationship between advertising strategies under conflict and coordination, respectively.

, 17 pages