COOPERATIVE ADVERTISING WITH REFERENCE PRICE EFFECT

Co-operative advertising, which usually occurred in the vertical supply chain, is a typically cost sharing and promotion mechanism for manufacturer to affect retailers' performances. However, previous cooperative advertising literatures ignores an important effect of advertising, i.e., reference price effect, which reflects the impact of reference price on demand. In this paper, we propose a dynamic cooperative advertising model with the reference price effect under Nerlove-Arrow model framework, then formulate both the advertising effect and reference-price effect into the demand function and analyze the optimal advertising decisions of manufacturer and retailer. New results show some differences from the previous researches, including: (i) in Nash Game, manufacturer's national advertising effort is positive correlated to retailer's marginal profit while retailer's advertising effort is positive correlated to manufacturer's marginal profit which is contradict with the results in previous literatures; (ii) the steady reference price is higher than market price in any cooperative advertising mechanism while most of previous researches show reference price tend to be equal to market price as time goes by.