Cooperative Advertising with Accrual Rate in a Dynamic Supply Chain

We consider a supply chain in which a manufacturer stimulates his retailers investing more local advertising expenditures through a cooperative advertising program (Co-op). Co-op advertising programs usually involve two important contractual terms, a participation rate and an accrual rate. While previous literatures have discussed the participation rate excessively, they seldom study the role of the accrual rate in cooperative advertising. To investigate the impact of the accrual rate on cooperative advertising decisions, we develop a dynamic cooperative advertising model for a single manufacturer–single retailer supply chain that incorporates the participation rate and the accrual rate simultaneously. We derive the equilibrium co-op decisions of two channel members, including the manufacturer’s national advertising efforts and his participation rate, as well as the retailer’s local advertising expenditure. Our analysis of the equilibrium solutions shows that an increase in participation rate will not always increase the retailer’s advertising efforts because of the accrual rate. Also, both the manufacturer and retailer can benefit from a high accrual rate.