Periodicity of pricing and marketing efforts in a distribution channel

Most research about cooperative (coop) advertising programs in channels relies on the assumption that manufacturers and retailers decide of pricing and marketing efforts simultaneously. This paper evaluates this central assumption and investigates the optimal periodicity (sequence of move) of pricing and marketing efforts (ME) decisions for a distribution channel. We develop a game theoretic model that accounts for pricing at each level of the channel, for the manufacturer’s ME mix strategies (a direct ME to consumers and coop advertising program offered to the retailer) and the retailer’s ME as well. We obtain solutions for a bilateral channel under different vertical interaction scenarios; when the channel is led by the manufacturer, the retailer or when channel members decide simultaneously of each of their marketing mix decisions (vertical Nash). We compare the effect of pricing and ME decision periodicity on outputs for each channel member. The main findings suggest that simultaneous decision-making of pricing and ME is optimal only for high enough levels of the manufacturer’s ME effects. For very highly effective marketing efforts, sequential play of pricing and ME allows channel members to implement equilibrium strategies and achieve maximum profits that would not be achieved with simultaneous decision-making. This highlights the importance of relaxing the simultaneous play assumption of pricing and ME in a distribution channel.