J Optim Theory Appl (2018) 176:509–525
Channel Coordination with Cooperative Advertising
Considering Effect of Advertising on Willingness to Pay
· Masoud Rabbani
· Ata Allah Taleizadeh
Received: 18 November 2016 / Accepted: 6 January 2018 / Published online: 16 January 2018
© Springer Science+Business Media, LLC, part of Springer Nature 2018
Abstract In this paper, cooperative advertising in a manufacturer–retailer supply
chain is studied. Advertising can enhance willingness to pay (WTP) of customers.
This trade-off between the beneﬁts of increasing WTP of customers and the advertis-
ing expenditure is a key to understanding the retailers optimal advertising decision.
On the other hand, it is interesting to understand in which condition supporting the
retailer for his advertising expenditure is beneﬁcial for the manufacturer. In this study,
in order to capture pricing and advertising strategies of the channel member, three non-
cooperative games including Nash, Stackelberg retailer and Stackelberg manufacturer
game-theoretic models are established. In spite of the related studies which restrict
price in order to prevent negative demand, the proposed model allows channel mem-
bers to increase their prices by enhancing WTP of customers. In this study, contrary to
similar additive form demand functions applied in the co-op ad literature which limits
their studies for cases that proﬁt function is concave with respect to variables, optimal
prices and advertising strategies are obtained for all the solution space. Surprisingly
for the very high values of the advertising effect coefﬁcient, a ﬁnite optimal advertising
expenditure is achieved.
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10957-
018-1217-5) contains supplementary material, which is available to authorized users.
Ata Allah Taleizadeh
School of Industrial Engineering, College of Engineering, University of Tehran, Tehran, Iran
GERAD, HEC Montreal, Montreal, Canada