Advertising and power structures in competing supply chains

https://doi.org/10.1016/j.cie.2020.106917Get rights and content

Highlights

  • Considering different advertising schemes in a dual exclusive channel.

  • The advertising efficiency is the highest when the leader advertises.

  • Endogenous cost sharing cannot coordinate the supply chain.

  • The proposed bargaining model is an effective coordination mechanism.

Abstract

This study investigates the impact of different price leadership structures on the efficacy of manufacturer advertising, retailer advertising, and cooperative advertising in a dual-exclusive channel system that may differ in market size. Our analysis indicates that without cost sharing, advertising efficiency is the highest when an advertiser is in the leader’s position. The previous literature has discussed a cost-sharing rate determined by a single-channel member excessively, but we find that the endogenous cost-sharing rate is not capable of coordinating the entire supply chain system. Bargaining solutions are proposed to solve the incoordination issue, in which a manufacturer and a retailer cooperate to determine the cost-sharing rate. Our analysis suggests that the proposed bargaining model is an effective coordination mechanism. Most notably, the range of optimal cost-sharing rate under manufacturer advertising with cost sharing appears to be quite close to marketing practices.

Introduction

It is easy to see that certain products may be advertised by a powerful manufacturer alone or a powerful retailer alone. For example, Mengniu, a leading dairy product manufacturer in China, performs all of the advertising activities alone. Toyota and Honda, the leading car manufacturers in Japan, explicitly prohibit certain types of their retailers to perform advertising (Cole, 2015). In contrast, Walmart and Target, major retailers, frequently advertise certain products alone (Liu, Cai, & Tsay, 2014). These varied advertising practices motivate us to ask our first research question: why would a powerful manufacturer or retailer prefer to perform advertising alone? One party performs advertising, and the other party commonly offers a cost sharing contract as an incentive to boost sale. Traditionally, if a retailer advertises, the upstream manufacturer may pay some or all of the advertising expenditures. Manufacturers in the United States offer about $36 billion in cooperative advertising programs to their retailers in 2015 (Karray, Martín-Herrán, & Zaccour, 2017). Likewise, if a manufacturer advertises, the downstream retailer may share a portion of these advertising expenditures.1 In the car industry, manufacturers require their dealers to share regional advertising expenditures (Bernstein, 2015).

In cooperative advertising with cost sharing, neither a manufacturer nor a retailer accepts less profit with cooperation than without cooperation. Although the previous literature has discussed a cost-sharing rate determined by a single-channel member (i.e., unilateral participation strategy) under different price leadership structures in a single channel excessively, such as Huang and Li, 2001, Huang et al., 2002, Li et al., 2002, Xie and Ai, 2006, and Yue, Austin, Wang, and Huang (2006), we find that the endogenous cost-sharing rate is not capable of coordinating the entire supply chain system. Zhang et al., 2013, Zhang et al., 2020 also note the existence of incoordination problem in the previous literature and proposed a bilateral participation strategy for the supply chain system. Moreover, Ahmadi-Javid and Hoseinpour (2012) point out the demand function adopted by the literature listed above is negative under certain conditions. The incoordination problem motivates us to ask the second question: who should determine the cost sharing rate? In a competitive business environment, individual business no longer competes as a stand-alone entity, but rather as supply chains, such as Toyota and Honda. Nevertheless, the literature dealing with cooperative advertising in channels with the horizontal competition is limited. It remains unknown whether this cost-sharing contract is able to coordinate competing supply chains in any given price leadership structure.

Our study answers the following research questions: (i) Why would a powerful advertiser prefer to advertise alone? (ii) How do product substitutability and relative channel status influence advertising efficiency among different price leadership structures in a dual-exclusive channel system? (iii) Who should determine the cost-sharing rate? To address these issues, this study investigates the impact of Manufacturer Stackelberg (MS), Retailer Stackelberg (RS), and Vertical Nash (VN) games on the efficacy of manufacturer advertising, retailer advertising and cooperative advertising in a dual-exclusive channel system, in which each manufacturer distributes its goods through an exclusive retailer to sell substitutable products that may differ in market base demand. Note that, unlike the traditional cooperative advertising scheme, in which the cost-sharing rate is determined by a channel member alone, in our model, the retailer and the manufacturer cooperate to determine the cost sharing rate.

To investigate the research question as to why a powerful advertiser may prefer to advertise alone, we first investigate manufacturer/retailer with and without advertising in MS, RS, and VN games, respectively. Our analysis shows that advertising efficiency is the highest when an advertiser is in the leader’s position. We then investigate the joint impact of product substitutability and relative channel status on the efficiency of manufacturer/retailer advertising without cost sharing among MS, RS and VN games. Our analysis demonstrates that the manufacturer in the follower's position can minimize its disadvantage by advertising, whereas the retailer cannot. Furthermore, the relative channel status has an impact on a channel member’s decision behavior. In particular, under manufacturer advertising, the manufacturer with a smaller base demand share may prefer to be the follower if the competition is fierce. In contrast, the retailer always has an incentive to play the leader’s role under retailer advertising. To investigate the research question on who should determine the cost-sharing rate, which is in line with the existing literature, we assume that the cost-sharing rate is determined by a single-channel member, and study the cost-sharing efficiency among MS, RS and VN games. Our analysis indicates that the endogenous cost-sharing rate is not capable of coordinating the entire supply chain system. This observation can be used to explain the reasons why the retailer prefers cost sharing to no cost sharing in the findings of Karray and Zaccour (2006). To solve the trivial game results, bargaining solutions are proposed to solve the incoordination issue, in which the manufacturer and the retailer cooperate to determine the cost sharing rate. Our analysis indicates that the proposed bargaining model is an effective solution for processing the infeasible problem.

The remainder of this study is organized as follows. In Section 2, we review the related literature. In Section 3, we describe the model in detail. In Section 4, we investigate manufacturer/retailer advertising with and without cost sharing. In Section 5, we extend our discussion to a bargaining model in which the manufacturer and the retailer cooperate to determine the cost-sharing rate. Moreover, consumer welfare is discussed to provide new managerial insights. In Section 6, we present conclusions and outlooks; and all proofs are relegated to Appendix.

Section snippets

Literature review

Two streams of literature are related to our work: the first stream relates to price leadership, and the second stream relates to cooperative advertising. The most related studies are presented in Table 1, in which SC represents a single channel, MMC represents a Monopoly manufacturer channel, DE represents a dual-exclusive channel, MA represents manufacturer advertising, RA represents retailer advertising, and CA represents cooperative advertising, EXC represents the exogenous cost-sharing

Model formulation and notation

This study considers a dual-exclusive channel system that may differ in market share, in which two manufacturer–retailer channels sell substitutable products in the end-customer market. The products are advertised by the exclusive manufacturer alone or the exclusive retailer alone. With the influence of advertising, the base market share Qi becomes:Qi=Ai+Lmiemi+Lrieri

where Ai denotes channel i’s initial base market share, i=1,2; emi denotes manufacturer i’s advertising spending; eri denotes

Advertising with and without cost sharing

To separate how leadership structure affects non-cooperative advertising efficiency from its effect on the cooperative advertising efficiency, we explore manufacturer/retailer advertising with and without cost sharing under MS, RS, and VN, respectively.

Advertising with bargaining

The cost-sharing rate determined by a single-channel member fails to coordinate the whole supply chain system. To solve the trivial game results, we propose a Nash Bargaining approach under manufacturer/retailer advertising with cost sharing, in which the manufacturer and the retailer cooperate to determine the cost sharing rate.

In market practices, a more normal means of cooperation occurs after a channel member moves first to offer a partner a sharing rate, and the partner comes back with a

Conclusion and discussion

This study investigates the impact of different price leadership structures on the efficacy of manufacturer/retailer advertising with and without cost sharing in a dual-exclusive channel system. Additionally, a bargaining model, in which a manufacturer and a retailer cooperate to determine the cost sharing rate, is considered to better understand different advertising programs under MS, RS and VN games.

Advertising efficiency is the highest when the advertiser is in the leader’s position. This

Acknowledgments

We are grateful to Editors and anonymous referee for their very valuable comments and suggestions. This work was supported by National Science Foundation of China No. 71571117 and 71971134, and Humanities and Social Science Foundation of Education Committee of China No. 18YJA630143.

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