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National advertising and cooperation in a manufacturer-two-retailers channel

Ben Youssef, Slim and Dridi, Dhouha (2011): National advertising and cooperation in a manufacturer-two-retailers channel.

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Abstract

We consider a supply channel composed of one manufacturer and two symmetric retailers. Three cases are studied. The non-cooperation case is a leader-follower relationship. The manufacturer determines his spending in national advertising and the wholesale price. Then, the retailers determine non-cooperatively the price for consumers. In the partial-cooperation case, retailers decide jointly for the price. In the full-cooperation case, all members of the channel cooperate by maximizing a joint profit function. Interestingly, partial-cooperation reduces the profits of retailers with respect to non-cooperation, when the degree of substituability between the two products proposed by retailers is low. Because of symmetry, this also implies that the total profit of retailers may decrease with partial-cooperation. We propose a cooperative implementable contract between all channel members, which shares the extra-profit due to full-cooperation. We propose a new and unusual evaluation of consumers' surplus which positively depends not only on the price-demand function but also on the spending in national advertising. Partial-cooperation is always the worst case for the manufacturer, the whole channel, consumers' surplus and social welfare, while full-cooperation is the best case.

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