Inequality aversion in cooperative advertising in supply chain: an experimental study

In this study, we experimentally investigate the decisions of a manufacturer and a retailer in cooperative advertising. Specifically, in the first stage, the manufacturer proposes the percentage he will reimburse on the advertising expenditure, and then the retailer decides the advertising expenditure in the second stage. In the controlled laboratory experiments, we find that the manufacturer's and the retailer's decisions systematically deviate from the equilibrium prediction and exhibit inequality aversion on both cost and profit. The manufacturer tends to share half of the advertising cost and also decreases the participation rate when his profit is less than the retailer, whereas the retailer decreases the advertising expenditure to reduce the gap on cost and profit between the two parties. We further develop behavioural models and show that the manufacturer's inequality aversion on cost can be a positive force, because it increases the supply chain profit when the profit margin ratio is relatively low between the manufacturer and the retailer.