Price dynamics and quality collaborations: a game theory exploration of cooperative advertising and contract design in manufacturer–retailer supply chains

This research presents a game theory model for extending a cooperative advertising and contract design (pricing and quality investment) problem in a manufacturer–retailer game. The demand of customers depends on selling price, quality, and advertisement expenditures. The manufacturer invests in national advertising (brand name investment) and the quality of the product, and the manufacturer decides on the wholesale price of the product. The retailer invests in local advertisement and decides about sale price of the product. The problem is analyzed in four different conditions: centralized, decentralized, revenue-sharing (contract design), and market segmentation conditions. The market segmentation condition considers customers’ characteristics into three different types: price-oriented customers, quality-oriented customers, and customers who are not price or quality oriented (individually). The model is solved in all conditions and the results are presented. Sensitivity analysis of key parameters is performed to analyze different situations and the optimal behavior of the supply chain players. Application of the proposed approach for a Middle Eastern country is provided and a real case of the generic medicines market in Iran investigates the performance of the proposed approach.