Horizontal cooperative programmes and cooperative advertising

Abstract

Horizontal inter-firm cooperation is an important form of cooperation between firms and has recently received increased attention from both researchers and professionals. This article examines advertising strategies involving horizontal cooperative programmes, and we focus on joint ventures and contractual alliances that characterise two prominent horizontal cooperative programmes. A modified Nerlove–Arrow model is employed to describe advertising efforts on goodwill and sales of products. Differential game theory is utilised to evaluate three cooperative scenarios. The scenarios include (i) no cooperative programme between two firms; (ii) the cooperative mode between the two firms is a joint venture; and (iii) the cooperative mode is a contractual alliance. The two firms’ optimal advertising levels and profits for their own brands as well as for the cooperative programmes are calculated and compared for different cooperative scenarios. For example, both firms show increases in their individual advertising levels when they are involved in a cooperative programme. Insight into the appropriate advertising, cost allocations and profit-sharing ratios are developed and analysed. It is demonstrated that cooperative programmes such as a joint venture or a contractual alliance are more profitable than non-cooperation. Using the model, analysis reveals that cooperation through a contractual alliance provides an opportunity to negotiate which of the two firms gets to control the advertising decisions for the cooperative programme’s product(s). Finally, it is noted that cooperation that utilises a contractual alliance occupies the dominant status for most of the profit-sharing patterns.

Keywords:

• supply chain management
• OR in marketing
• cooperative advertising
• cooperative programme
• goodwill
• differential game

Acknowledgements

This study was supported by the National Natural Science Foundation of China (Grant No. 70901068 71271198), the Funds for International Cooperation and Exchange of the National Natural Science Foundation of China (Grant No.71110107024) and Chinese Universities Scientific Fund. Liang Liang and Qinglong Gou would also like to acknowledge the Science Fund for Creative Research Groups of the National Natural Science Foundation of China (Grant No. 71121061) for support of their research.