A game theoretic approach to coordination of pricing, ordering, and co-op advertising in supply chains with stochastic demand

Document Type : Article


Department of Industrial Engineering, Electronic Branch, Islamic Azad University, Tehran, Iran


This paper combines the newsboy problem with the cooperative advertisement problem in the presence of uncertain demand which depends on retail price as well as both local and national advertising expenditures to coordinate pricing, ordering, and advertising decisions in a manufacturer-retailer supply chain. A game theoretic approach is adopted to determine the equilibrium values of the decisions. Three different game scenarios based on the newsboy problem model are developed and analyzed: 1) Stackelberg manufacturer game in which manufacturer as the dominant power plays the role of leader in the market and the follower retailer makes its own best decisions after observing the leader decisions, 2) Nash game wherein both manufacturer and retailer have equal power in the market and make their decisions simultaneously to find their own best strategies and 3) centralized scenario in which retailer and manufacturer make the best decisions by information sharing and joint cooperation. The equilibrium decisions are obtained exactly in the three scenarios. Some corollaries are also presented and theoretically proved to show the relationships among the variables in centralized vs. decentralized supply chain. Finally, some numerical examples are randomly generated and a sensitivity analysis is carried out to show capabilities of the proposed models.


Main Subjects

1. Dridi, D. and Ben Youssef, S. A game theoretic framework
for competing/cooperating retailers under price
and advertising dependent demand", Munich Personal
RePEc Archive, available at: https://mpra.ub.unimuenchen.
de/62705/ (2015).
2. Berger, P. Vertical cooperative advertising ventures",
J. of Mark. Res., 9(3), pp. 309{312 (1972).
3. Aust, G. and Buscher, U. Cooperative advertising
H. Ghashghaei and M. Mozafari/Scientia Iranica, Transactions E: Industrial Engineering 27 (2020) 3289{3304 3301
models in supply chain management: A review", Eur.
J. of Oper. Res., 234(1), pp. 1{14 (2014).
4. Huang, Z. and Li, S.X. Co-op advertising models of
manufacturer-retailer supply chains: A game theoretic
approach", Eur. J. of Oper. Res., 135, pp. 527{544
5. Xie, J. and Wei, J.C. Coordinating advertising and
pricing in a manufacturer-retailer channel", Eur. J. of
Oper. Res., 197, pp. 785{791 (2009).
6. Karray, S. and Amin, S.H. Cooperative advertising
in a supply chain with retail competition", Int. J. of
Prod. Res., 53(1), pp. 88{105 (2015).
7. Yan, R., Cao, Z., and Pei, Z. Manufacturer's cooperative
advertising, demand uncertainty, and information
sharing", J. of Bus. Res., 69(2), pp. 709{717 (2016).
8. Jrgensen, S. and Zaccour, G. A survey of gametheoretic
models of cooperative advertising", Eur. J.
of Oper. Res., 237(1), pp. 1{14 (2014).
9. Alirezaei, A. and Khoshalhan, F. Coordination of
pricing and co-op advertising models in supply chain:
A game theoretic approach", Int. J. of Ind. Eng.
Comput., 5, pp. 23{40 (2014).
10. He, X., Prasad, A., and Sethi, S.P. Cooperative
advertising and pricing in a dynamic stochastic supply
chain: Feedback Stackelberg strategies", Prod. and
Oper. Manag., 18, pp. 78{94 (2009).
11. Szmerekovsky, J.G. and Zhang, J. Pricing and twotier
advertising with one manufacturer and one retailer",
Eur. J. of Oper. Res., 192(3), pp. 904{917
12. Xie, J. and Neyret, A. Computers & industrial
engineering co-op advertising and pricing models in
manufacturer - retailer supply chains", Comput. & Ind.
Eng., 56(4), pp. 1375{1385 (2009).
13. Chen, T.H. E ects of the pricing and cooperative advertising
policies in a two-echelon dual-channel supply
chain", Comput. & Ind. Eng., 87, pp. 250{259 (2015).
14. Seyed Esfahani, M.M., Biazaran, M., and Gharakhani,
M. A game theoretic approach to coordinate pricing
and vertical co-op advertising in manufacturer-retailer
supply chains", Eur. J. of Oper. Res., 211, pp. 263{
273 (2011).