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Advertising and Price Competition in a Manufacturer-Retailer Channel Structure

by Chakravarthi Narasimhan, Yeujun Yoon, Tat Y. Chan

ARTICLE | International Journal of Research in Marketing | Forthcoming


We investigate how manufacturers’ advertising competition, when advertising has a dynamic impact on the goodwill that affects market demand, interacts with the price competition in a manufacturer-retailer channel. We find that advertising and pricing are strategic complements in the laundry detergent category as manufacturer advertising increases the price elasticity of demand. Advertising competition intensifies price competition but it also improves the profitability of manufacturers. The presence of retailers in the channel leads to increased advertising spending while mitigates the extent of price competition. Manufacturers can enjoy a higher profit from using retailers when they compete in both price and advertising. This implies that previous channel studies may have underestimated the benefits of manufacturers employing retailers to avoid direct competition. Finally, we show that the benefits are asymmetric across manufacturers as brands with a higher goodwill level and advertising effectiveness seem to benefit more even when there is no cost advantage relative to its competitors. 
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