Coordination Contracts of Dual-Channel Supply Chain Considering Advertising Cooperation

1. Introduction

With the rapid development of e-commerce and logistics information technology, online shopping has gradually gained acceptance among consumers. Hence, as a response to this transformation, enterprises have established online direct sales channels to sell their products in addition to their existing offline channels. According to New York Times, 42% of top suppliers, like Apple and Lenovo sells their products over the internet directly (Zhang and Wang, 2018). The development of online direct sales channels can better meet the needs of consumers with different channel preferences and improve the operation efficiency of enterprises. Chiang et al. (2003) found that the manufacturer can mitigate the profit loss by introducing a direct channel. Kumar and Ruan (2002) pointed out that manufacturers can generate more profits by using a direct channel. They also indicated that this will benefit retailers as well. As a result, online and offline channels coexist, forming a dual-channel supply chain system. However, consumers only choose one of these channels to purchase products, thereby leading to conflicts and competition between the two. To resolve this issue, many coordination contracts have been proposed (Jabarzare and Rasti-Barzoki, 2019; Xie et al., 2017).

Advertising cooperation has been proposed as an effective coordination contract for monetary incentives offered by manufacturers to retailers to boost the advertisement of their products. According to a survey conducted by netsertive in 2015, manufactures incurred an estimated cost of $36 billion, which amounts to approximately 12% of their total advertising spending (Giovanni et al., 2019; Reprot, 2015). This is because the advertising is generally done by retailers to increase market demand and improve supply chain efficiency. However, retailers spend a lot of resources on advertising, thus leaving no incentives for retailers to invest in advertising. As compared to traditional channels, the lack of incentives to advertise is more obvious in dual-channel supply chain.

Giovanni et al. (2019) proposed that coordination of supply chains can be realized by establishing advertising cooperation contract. Aust and Buscher (2014) and Jørgensen and Zaccour (2014) have also verified the effectiveness of advertising cooperation for firms in a supply chain. Therefore, designing various coordination contracts based on advertising cooperation is important for improving the performance of dual-channel supply chain. The importance of coordination contracts in the case of dual-channel supply chain has been widely recognized in the extant literature (Berger et al., 2006; Chen, 2015; Chen et al., 2012; Jabarzare, N. and Rasti-Barzoki, 2019). Most studies have advanced single coordination contracts to coordinate dual-channel supply chains, which often cannot eliminate double marginalization. For example, Xie et al. (2017) investigated coordination contracts of centralized and decentralized dual-channel closed-loop supply chain and found that advertising increases offline demand, but fails to coordinate the supply chain. In the literature on coordination of dual-channel supply chain with respect to advertising cooperation, there is very limited research on combination contracts, which may remove double marginalization.

To fill abovementioned research gap, we consider the effects of advertising and investigate pricing and advertising level decisions of dual-channel supply chain in the cases without a coordination contract and with one coordination contract. Furthermore, by verifying the imperfect coordination of one coordination contract, we incorporate two coordination contracts and succeed in coordinating a dual-channel supply chain. Specifically, we address the following research questions:

• 1.

  What are the equilibrium results of a dual-channel supply chain under different models?

• 2.

  How to coordinate a dual-channel supply chain?

• 3.

  How do various factors such as the proportion of the traditional retail market affect the decisions of dual-channel supply chain?