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Advertising and Pricing Decisions in a Manufacturer-Retailer Channel with Demand and Cost Disruptions

This paper investigates advertising level, pricing and production quantity decision problems in a supply chain when demand and production cost disruptions occur simultaneously. The supply chain consists of one manufacturer and one retailer where customer demand depends on the retail price and advertisement expenditure. The authors examine this problem in two game-theoretic models: a cooperative game and a non-cooperative Stackelberg-manufacturer game, respectively. Propositions and insights are developed from the analysis of these models. The original production plan has some robustness in face of the disruptions of demand and production cost in both cooperative and non-cooperative models. Only when the disruptions exceed some thresholds will the channel members take an overall adjustment. In addition, the cooperative channel achieves higher channel profits and higher social surplus than the non-cooperative model by using a lower retail price and a higher level of advertising efforts to promote demand.