Quality improvement vs advertising support Which strategy works better for a manufacturer?

We consider a marketing channel with a single manufacturer and a single retailer where both advertising and quality improvement contribute to the build-up of goodwill In a non-coop scenario the retailer controls the advertising efforts while the manufacturer controls the quality improvements and wholesale price Although improving quality positively contributes to goodwill it also increases the production cost thereby reducing the manufacturer s profit In a coop scenario the manufacturer supports the retailer s advertising while decreasing his investments in quality We investigate the conditions under which a coop program is beneficial when such a trade-off occurs Our results demonstrate that only when advertising significantly contributes to goodwill the manufacturer has an incentive to cooperate and a coop program turns out to be Pareto improving Conversely the retailer is always better off with a coop program Moreover the channel is operational- and marketing-driven when quality effectiveness is high independent of advertising effectiveness or when both quality and advertising effectiveness are large In all other cases the channel is marketing-driven (C) 2010 Elsevier B V All rights reserved