Solving a Two-Period Cooperative Advertising Problem Using Dynamic Programming

Abstract

Cooperative advertising is a cost-sharing mechanism in which a part of retailers' advertising investments are financed by the manufacturers. In recent years, investment among advertising options has become a difficult marketing issue. In this paper, the cooperative advertising problem with advertising options is investigated in a two-period horizon in which the market share in the second period depends on the decisions made in the first period. The problem is solved for two cases of the absence and presence of cooperative advertising contract, and the results are compared. The solution to the problem is presented using the concepts of the Nash equilibrium, Stackelberg game, stochastic games, and dynamic programming. The computational results using numerical examples show that if the cooperative advertising contract is offered in the win-win condition, the players’ profit will increase significantly.