The Strategic Value of Cooperative Advertising in the Dual-Channel Competition

ABSTRACT With the rapid development of e-commerce, many manufacturers today are opting to open an online channel to engage in direct online sales, which leads to intense channel competition with retailers. It is managerially important for both the manufacturer and the retailer to develop some cooperative mechanisms to improve channel coordination. Our research focuses on the strategic role played by cooperative advertising in the dual-channel competition of the manufacturer–retailer supply chain. We use a game-theoretical model to show that a cooperative advertising program can be utilized as an effective coordinative mechanism to alleviate dual-channel competition and thus help to improve the channel as a whole and the individual channel members’ performance. Depending on different product compatibilities with the Web, the retailer’s investment and the manufacturer’s participation rate in the cooperative advertising program will also be different. When the product has strong Web compatibility, retailers invest more in cooperative advertising and the manufacturer needs to contribute a high participation rate. When product compatibility with the Web is weak, the retailer’s investment on cooperative advertising is small and the manufacturer’s participation rate is low. However, when a product enjoys an overwhelming advantage in being sold online over the traditional channel, the value of a cooperative advertising program vanishes.

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