THE EFFECTS OF RETAILER AND CONSUMER RESPONSE ON OPTIMAL MANUFACTURERADVERTISING AND TRADE PROMOTION STRATEGIES

This research examines how retailer and consumer responses influence a manufacturer's optimal advertising and trade promotion plans. We deve lop a dynamic optimization model which considers the actions of the ma nufacturer, retailers, and consumers. The manufacturer attempts to max imize its profits by advertising directly to consumers and offering pe riodic trade deal discounts to the retailer in the hope that the retai ler will in turn ''pass through'' a retailer promotion to the consumer . We show how the manufacturer's optimal allocation depends on consume r response to advertising, consumer response to retailer promotions, r etailer inventory carrying cost, and retailer passthrough behavior. Fo r example, we find that retailer carrying costs and promotion wearout play a central role in constraining expenditures on trade promotions. We predict that as trade promotions are designed to eliminate forward buying, manufacturers will find it in their interest to promote more s teeply. We also find a natural tendency for advertising and trade deal ing to substitute for each other in an optimal plan.