Cooperative Advertising With Fairness Concerns In Distribution Channels

In a typical distribution channel of a certain product, the upstreammanufacturer sells goods to the downstream retailer, and the retailer usuallyconducts local promotions with local advertising. The manufacturer often usesthe cooperative advertising (co-op advertising), which means the manufacturershares a portion of the retailer’s local advertising costs, to boost the sales andincrease his profit. However, the co-op advertising is in general not capable ofachieving channel coordination (i.e., to obtain the centralized solution bycoordinating channel member’s individual efforts in a decentralized system).The existing research supposes that the decision makers do not have fairnessconcerns, that is to say, they do not care about other channel members’ profitswhen making the decision. This study considers the decision maker’s fairnessconcern in the co-op advertising, and their effects on the co-op advertising andchannel coordination. There are two kinds of fairness concerns: vertical fairnessconcerns and horizontal fairness concerns. Vertical fairness concerns are thefairness between the manufacturer and the retailer, while horizontal fairnessconcerns are peer-induced fairness among the retailers.This paper first studies the effects of vertical fairness concerns on the co-opadvertising in a bi-monopoly channel structure and a channel structure with onemanufacturer and multiple homogenous competing retailers. We get several conclusions:(1) The co-op advertising can coordinate the distribution channel if the retailer hasvertical fairness concerns;(2) Retailer’s fairness concerns will not reduce the efficiencyof the co-op advertising;(3) There exists the Pareto Improvement of the profits of bothchannel members if a no fair-minded retailer changes to a fair-minded retailer.Then, this paper studies the effects of horizontal fairness concerns on the co-opadvertising in a distribution channel structure with one manufacturer and twoheterogeneous independent or competing retailers. We have several conclusions: if theretailer has horizontal fairness concerns but no vertical fairness concerns, then no matterretailers are independent or competing,(1) The manufacturer’s profit increases, theadvertising level of the fair-minded retailer increases, the participation rate, advertisinglevel and profit of the other retailer decrease, comparing to the situation with no fair-minded retailer;(2) The channel cannot be coordinated, and the efficiency of theco-op advertising may decrease.The major contributions of this study are as follows:(1) It takes a lead inthe research of fairness concerns in the co-op advertising in distributionchannels;(2) It studies the vertical fairness concerns between the manufacturerand the retailer, and proves that the co-op advertising can coordinate the channelwhen the retailer has vertical fairness concerns;(3) It studies the horizontalfairness concerns between two heterogeneousretailers, and finds that theretailer’s horizontal fairness concerns can improve the manufacturer’s profit.