Manufacturer's pricing strategy in a two-level supply chain with competing retailers and advertising cost dependent demand

a r t i c l e i n f o The paper studies a two-echelon supply chain comprising one manufacturer and two competing retailers with advertising cost dependent demand. The manufacturer acts as the Stackelberg leader who specifies wholesale price for each retailer. The two retailers compete with each other in advertising and they have different sales costs. The manufacturer uses one of the following two pricing strategies: (i) setting the same wholesale price for both the retailers irrespective of the difference in their sales costs; (ii) setting different wholesale prices for the retailers depending on their sales costs. Two models are developed. In the first model, the manufacturer shares a fraction of each retailer's advertising cost while in the second model, the manufacturer does not share any retailer's advertising expenses. In both the models, we derive the retailers' and manufacturer's optimal strategies. A numerical example is given to illustrate the theoretical results developed in each model. Computational results show that it is always beneficial for the manufacturer to adopt different wholesale pricing strategy for the retailers. Rapid technological advancement, increasing expectation of customer and shortened product life-cycle have intensified competition and introduced new challenges in the market. To overcome the situation , companies should have good flexibility to respond and capability to adopt new strategies to utilize greater share of the market demand. More and more companies are resorted to depend on service and product quality in order to avoid traditional competition which focuses solely on price. Advertising is one way of promotional campaign used by many firms to provide customers the brand knowledge of their products and services and other specialties of their organizations. Depending upon the product type and market demand, either the manufacturer or the retailer or both participate in advertising. Two-tier advertising or cooperative (coop) advertising is an interactive scheme in a manufacturer–retailer system in which the manufacturer pays a part of the advertising expenditure incurred by the retailer in local advertisement. For example, Small World Toys offers a 2% advertising on total net purchases (Small World Toys, 2007). In personal computer industry, IBM offers a 50–50 split of advertising costs with retailer while Apple Computer pays 75% of the media cost (Brennan, 1988). Manufacturer uses coop advertising to strengthen the image of the brand and motivate immediate sales at the retail level while retailer uses local advertising to bring potential customers to the …