Modeling subsidy transfer in cooperative advertising using Stackelberg game theory

Abstract

Dynamic game theoretic model approach stands out as a choice tool for considering subsidy transfer in cooperative advertising. In spite of the benefits of static models they are not known to have been used to study subsidy transfer. This work studies cooperative advertising subsidy transfer in a three-level manufacturer-distributor-retailer supply channel using Stackelberg static game. The retailer is directly involved in local advertising, while the manufacturer indirectly participates in retail advertising by providing subsidy to the retailer through the distributor. The work models the demand function using the effect of advertising on demand, and models the payoff using a revenue-expenditure formula. It considers four channel structures, and obtains the optimal advertising effort, the optimal participation rates, and the payoffs for each scenario. The work observes that the payoffs are large with distributor’s intervention subsidy, but best with subsidy transfer. They are worst with non-provision and non-transfer of subsidy. Thus, the supply channel members should prioritize the distributor’s participation in retail advertising either through subsidy transfer or intervention.