A differential game of retailer promotions. (Q1398388)

Assume that \(N\) retailers choose their local promotion rates to increase the demand at their outlets, while the manufacturer controls his promotion rate in national media. By doing this he affects in a positive way the brand image, while the retailers affect the brand image negatively despite the fact the latter has a positive impact on the outlet demand. The authors propose a differential game setting to identify Nash equilibrium marketing strategies to all the players. A detailed characterization of these strategies is provided. In the first part of this interesting paper, the authors derive noncooperative closed-loop promotion strategies by means of H-J-B equations. Several properties of these strategies are specified by means of diagrams. Next, the problem is studied in a cooperative framework by means of an optimal control formulation. It is shown that rational advertising should be highest under coordination. In addition, the threshold at which promotion switches from zero to positive is smaller in the cooperative setting than in the noncooperative one, showing thereby that the retailers are more cautious about their promotion in the noncooperative case. In the last part of the paper, the manufacturer acts as a leader announcing an incentive strategy first to be followed by retailers, this aim is to induce them to select coordinated promotion efforts and to stick to their parts of the agreed solutions.