Supply chain coordination through cooperative advertising with reference price effect

Cooperative advertising, which usually occurs in a vertical supply chain, is typically a cost sharing and promotion mechanism for the manufacturer to affect retail performance. Research in the literature, however, rarely considers the important phenomenon that advertising has a positive effect on the consumer's reference price. In fact, when a consumer makes a decision to buy a product or not, a reference price is usually in his mind and plays a determinant role. Taking into account the impact of advertising on the reference price, this paper proposes a dynamic cooperative advertising model for a manufacturer-retailer supply chain and analyzes how the reference price effect would influence the decisions of all the channel members. In our model, both the consumer's goodwill and reference price for the product are assumed to be influenced by the advertising and are modeled in differential dynamic equations. In addition, the advertising level, the consumer's goodwill and the reference price are all assumed to have positive effect on sales. Utilizing differential game theory, this paper formulates the optimal decisions of the manufacturer and the retailer in two different game scenarios: Stackelberg game and cooperative game. Also, this paper proposes a new mechanism to coordinate the supply chain in which both the manufacturer and the retailer share each other's advertising costs. (C) 2012 Elsevier Ltd. All rights reserved.