Co-op Advertising, Pricing, and Logistics in a Dynamic Three-Echelon Supply Chain

We propose a model to assess the value of a distributor in a dynamic stochastic cooperative advertising supply chain in which a manufacturer wholesales its product to the distributor who in turn sells it to a retailer. Moreover and importantly, the distributor also intermediates the pricing and advertising decisions between the manufacturer and the retailer. For the resulting 3-player hierarchical game formulation of the supply chain, we characterize the feedback Stackelberg equilibrium in terms of a system of coupled algebraic equations and show it to admit a unique solution. We find that the value added by the distributor to the supply chain depends critically on the elasticity of the demand function for the product, a result that has practical implications for the kinds of product where having a distributor is most desirable. Secondly, our model indicates that the presence of the distributor can enhance the margins of both the retailer and manufacturer relative to the case of no distributor. Thirdly, as the distributor saves on the transport cost, the marginal advertising cost to achieving additional market awareness is reduced, which may induce both the retailer and manufacturer to advertise more, thereby enhancing the total value of the supply chain