On Coordination of Dynamic Marketing Channels and Two-part Wholesale Tariff

This paper considers a differential game model of a simple marketing channel formed of one manufacturer and one retailer. The manufacturer controls the advertising in the brand equity and the wholesale price and the retailer the promotion of the brand and its price to consumer. The paper shows that the result stated in a static game context, namely that the manufacturer can coordinate the channel through a two-part wholesale tariff, does not extend to a dynamic setting. The existence of such coordinated two-part tariff is next discussed under the restrictive assumptions of (i) full commitment of the manufacturer to the vertically-integrated solution and (ii) a retailer that cannot influence the evolution of the state (brand equity). In any event, the conclusion is that it is not in the best interest of the manufacturer to commit.