Stackelberg game-theoretic model for optimizing purchasing, advertising and pricing in a three-member supply chain

Supplier development (SD) intends to improve supplier-manufacturer channel`s performance and Cooperative (Co-op) advertising induces sales through manufacturer-retailer coordination. The manufacturer is a key member to run these programs within the supply chains in order to increase channel efficiency. This study addresses a single-supplier single-manufacturer single-retailer channel whereby the manufacturer simultaneously engages in supplier development and co-op advertising with his supplier and retailer, respectively. We consider Stackelberg game-theoretic model to determine how the manufacturer optimally allocates his limited budget between advertising expenditures and supplier development investments; meanwhile he suffers from risk. Numerical simulations are employed to establish optimal solutions of channel members and to provide useful insights into the mutual impacts of co-op advertising and SD decisions. Our results show that the manufacturer achieves higher benefits through coordination settings within a three-member distribution channel.