Cooperative Advertising With Bilateral Participation: A Coordinating Mechanism In A Distribution Channel

Channel coordination is a central topic in the study of Supply ChinaManagement. Studies of channel coordination in a distribution channel aim atobtaining the centralized solution by coordinating channel member's individualefforts in a decentralized system. Cooperative (Co-op) advertising is acoordinating mechanism that suggests channel members properly share eachother's advertising costs so that channel coordination is achieved.In a typical distribution channel of a certain product, the upstreammanufacturer often uses the national advertising to build up and strengthen itsbrand image, while the downstream retailer usually makes local promotions withlocal advertising. Conventional studies of co-op advertising suggest that themanufacturer should share a portion of the retailer's local advertising costs toinduce sales and increase the total channel profit, which we referred to as theco-op advertising with unilateral participation, or simply the unilateral co-opadvertising. However, this study finds that the unilateral co-op advertising is ingeneral not capable of achieving channel coordination. In contrast with theco-op advertising with unilateral participation, we propose the co-op advertisingwith bilateral participation, in which the retailer also shares a portion of themanufacturer's national advertising cost. It is shown that the bilateralparticipation mechanism is able to coordinate the distribution channel withproperly chosen participation rates.The main purpose of this study is to confirm the superiority of the bilateralparticipation to the traditional unilateral one by making a full comparison of twomechanisms. We first study the bilateral participation mechanism in a simplebi-monopoly channel structure, and then extend the results to the channelstructure with multiple (independent or competing) downstream retailers. Thisstudy takes perspectives from both qualitative research and quantitative research.In view of the qualitative research, we adopt a general demand function andshow that:1) The bilateral participation mechanism is able to coordinate thedistribution channel while the unilateral one is in general not able to do so;2) For any given unilateral participation scheme, there exists, under mildconditions, a bilateral participation scheme which can make a Paretoimprovement in terms of channel member's individual profits. In view of thequantitative research, we adopt several commonly used demand functions andconsider different game settings; we solve the equilibrium solutions inclosed-form and analytically estimate the system efficiency bounds. By makinga full-scale comparison of two participation mechanisms, we confirm thesuperiority of the bilateral participation. For example, it is found that under theunilateral participation mechanism the channel efficiency decreases as the localadvertising's intra-brand stealing effect gets more intensified, in additional, itmay also suffer from an increasing number of the retailers. However, under thebilateral participation mechanism the channel efficiency will stay unaffected atits maximum level (100%) with either of the above two situations.The major contributions of this study are as follows:1) It takes a lead inthe research of bilateral participations and is among the first to provide a clearincentive mechanism in co-op advertising;2) It proves with a very generaldemand function that the bilateral participation mechanism is able to coordinatethe distribution channel and can make a Pareto improvement in terms of channelmember's individual profits compared with the unilateral one;3) It explicitlyestimates the channel efficiencies with several commonly used demandfunctions under different game settings, and confirm the superiority of thebilateral participation mechanism to the traditional unilateral one by making afull-scale comparison of the two mechanisms.