A Dynamic Model of Channel Member Strategies for Marketing Expenditures

We develop a dynamic model for determining the equilibrium marketing effort levels for a manufacturer and a retailer in a two-member marketing channel. The existence of carry-over effects of marketing effort of channel members leads to an accumulation of goodwill for them over time. This necessitates modeling the relationship between the effort and channel sales in a dynamic framework as goodwill accumulation creates an incentive for channel members to invest in marketing effort in order to obtain future benefits. By explicitly recognizing that each member's decision is affected by the other's actions, we derive their equilibrium effort levels over time when they follow either a coordinated or an uncoordinated strategy and also determine the profit implications of these strategies for the channel members. We examine the effect of channel dynamics on the difference in profits resulting from following coordinated as opposed to uncoordinated strategies and identify situations in which this profit differential provides an incentive for channel members to coordinate their marketing efforts. Further, we derive empirically testable hypotheses that provide a basis for predicting when channel coordination would take place in a dynamic context.