Research On Supply Chain Cooperative Advertising And Ordering Strategies With The Loss-Averse Agents

Abstract:Cooperative advertising plays an important role in strategies of product promotion in today’s increasingly competition. Decision makers of the supply chain cooperative advertising must not only consider the expected profits, but also consider the expected loss to face the uncertainty of the future market. Most previous research on cooperative advertising assumes that decision makers are risk-neutral, but it’s not consistent with the reality life. The majority of decision makers in real life have the behavior of loss aversion. Therefore, taking loss aversion into consideration in the cooperative advertising model is necessary and more practical.This paper explores the effects of loss aversion from the perspective of retailers and manufacturers respectively using the theoretical ideas of game theory. In addition, this paper introduces competitive factors to study the impact of loss aversion on cooperative advertising problem. The main content of this paper is summarized as follows:Firstly, this paper assumes that the retailer is loss-averse and the manufacturer is risk-neutral. And develops a corresponding cooperative advertising model based on loss aversion utility function within prospect theory framework. And then compare the results with the traditional risk-neutral retailer cooperative advertising model. The results shows both the optimal order quantity and the advertising expenditure of loss-averse retailers are less than those of risk-neutral retailers. Both the optimal national advertising expenditure and the optimal sharing ratio of the manufacture vary with the degree of retailer’s loss aversion.Secondly, this paper assumes that the manufacturer is loss-averse and the retailer is risk-neutral to analyze the impact of loss aversion on each member’s optimal decisions from the prospect of manufacturers. And develops a corresponding cooperative advertising model based on loss aversion utility function within prospect theory framework. And then compares the results with the traditional risk-neutral manufacture cooperative advertising model. The result shows that both the optimal national advertising expenditure and optimal sharing ratio of loss-averse manufactures are less than those of risk-neutral manufactures, and both decrease with the increasing of the degree of loss aversion. And the optimal order quantity decreases with the increasing of the degree of loss aversion.Finally, this paper considers a case with one manufacture and two competing retailers. The manufacturer is risk neutral and the two retailers are both loss-averse. The point focuses on the optimal decisions of the loss-averse retailers under competitive environment, and then compare with the risk-neutral retailers’optimal decision. Results show that both the optimal order quantity and the advertising expenditure of loss-averse retailers are less than those of risk-neutral retailers. In addition, when one of the loss-averse retailers increases his advertising expenditure, the other one will increases his advertising expenditure as well, but will reduces the optimal order quantity at the same time.