Cooperative advertising in social networks with positive externalities

Abstract

We study the decisions of a supplier and retailer in a cooperative advertising program to sell divisible products to consumers in a social network with positive externalities. The supplier decides its participation rate, the retailer with a limited budget decides discriminative advertising expenditure for consumers, and consumers decide their purchase levels. In this study, we solve the subgame perfect equilibrium of the game between the supplier, retailer, and consumers. The equilibrium leads to a new demand function of advertising expenditure, which is different from those demand functions typically assumed in existing studies. In the equilibrium, the higher a consumer's network influence quantified by Bonacich centrality, the higher is the retailer's advertising expenditure on the consumer. We characterize the supplier's participation rate by two network‐dependent thresholds. If the retailer's budget level is lower than one threshold or higher than the other, the participation rate will not depend on the network structure. Although both parties' profits and the retailer's advertising expenditure increase with the network density, the supplier's participation rate decreases with it. Finally, the retailer's profits can be improved significantly by exploiting the network information and advertising cooperatively.