Cooperative advertising in a marketing channel

This paper examines dynamic advertising and promotion strategies in a marke ting channel where the retailer promotes the manufacturer product and the m anufacturer spends on advertising to build a stock of goodwill. We assume t hat sales depend on goodwill and promotion activities and that there are de creasing marginal returns to goodwill. Two scenarios are studied. First, th e manufacturer and retailer determine noncooperatively their respective str ategies. Second, the game is played A la Stackelberg with the manufacturer as the leader who supports partially the cost of the promotion activities o f the retailer. In both cases, stationary Markovian strategies are characte rized. These scenarios are examined also in the absence of decreasing margi nal effect of goodwill on sales. The results show that, whether or not the goodwill stock has a decreasing marginal effect on sales, the cooperative a dvertising program is a coordinating mechanism in the marketing channel, i. e., both players receive higher payoffs.