Studying the Effect of Noise on Pricing and Marketing Decisions of New Products under Co-op Advertising Strategy in Supply Chains: Game Theoretical Approaches

Abstract

The success of launching new products is the main challenge of companies since it is one of the key factors of competition. Thus, success in today’s high rival markets depends on the presentation of new products with new options, which must be compatible with customers’ desires. This research aims to analyze the psychological effect of the noise of a new product on the total profit of the chain and the optimal pricing and marketing decisions of the chain’s members. Additionally, a cooperative (co-op) advertising strategy as a coordination mechanism is considered among the partners such that it helps them to obtain their target markets. Commonly, under co-op advertising, the manufacturer pays a percentage of the retailer’s advertising costs. In this chain, the manufacturer and the retailer agree to share the retailer’s advertising costs. Afterwards, four different relations between the manufacturer and retailer are studied and analyzed including three non-cooperative games with symmetrical distribution of market power and one asymmetrical distribution of it. So, four game models and their closed-form solutions are illustrated with a numerical example. It was found that the noise effect affects the total profit of the manufacturer and the retailer, as well as the supply chain by influencing the partners’ advertising policies. In other word, increasing the noise effect of the product indicates to the manufacturer and the retailer to globally and locally advertise more, respectively. In turn, their profits increase, although also increasing the advertising costs. Finally, a complete sensitivity analysis is conducted and reported.

Keywords

• vertical cooperative advertising
• pricing
• noise effect
• game theory
• supply chain