In this paper, we study the interesting and complicated effects of retailer in-store media on distribution channel relationships. With the help of advanced technology, retailers can open in-store media in their stores and allow manufacturers to advertise through the instore media. We show that opening in-store media is a strategic decision for a retailer, and a retailer may strategically subsidize manufacturers on their advertising through instore media to better coordinate the channel. Even when in-store media is more effective than commercial media (i.e., radio, TV, newspaper, etc.), a retailer may still charge an advertising rate lower than commercial media does. We also show that the benefit of instore media to a retailer can be a U-shaped curve of manufacturer bargaining power, and a retailer may introduce in-store media only when manufacturer bargaining power is either very high or very low, but not intermediate. With manufacturer competition, a retailer can strategically use in-store media to ration excessive advertising between manufacturers, achieving better channel coordination. When manufacturers are asymmetric with pre-advertising brand awareness, a retailer has incentive to subsidize manufacturers whose brand awareness is higher. We also find that retailer in-store media can benefit social welfare even when in-store media is less effective than commercial media. However, if in-store media effectiveness is very low, a retailer may introduce instore media for its own benefit with the sacrifice on social welfare.
