Modeling brand advertising with heterogeneous consumer response: channel implications

The paper explores the implications of heterogeneous consumer response to advertising for the equilibrium strategies chosen by firms in a distribution channel. We solve a simple game theoretic model using a variation of consumers’ Hotelling utility model for a decentralized and a coordinated channel. The key findings show that heterogeneity considerably affects the value of channel coordination. Overlooking heterogeneous responses to advertising can lead to either undercutting or overestimating channel coordination benefits. In particular, our results indicate that, in contrast to previous findings in the literature, channel coordination might result in higher consumer prices especially when the average response to brand advertising exceeds consumers’ marginal disutility cost. Copyright Springer Science+Business Media New York 2015