Effectiveness of retail joint promotions under different channel structures

We investigate the effects of horizontal joint promotions (HJP) initiated by competing retailers on the supply chain’s strategies and profits and address the following questions; can HJP be profitable for competing retailers and for the whole channel? Under what market conditions and for which channel structures? We develop a game theoretic model to address these issues. We study market conditions conducive for profitable joint retail promotions under different channel structures; when both retailers are decentralized, centralized and when one is centralized and its competitor is decentralized. We find that for low levels of promotional effectiveness, HJP improves each channel member’s profits through demand expansion and higher margins under all channel structures. However, a highly effective HJP can only be initiated by decentralized retailers. In particular, for low levels of cross price effects, demand decreases with HJP and so do the retailers’ profits since the latter’s gain in margins are not sufficient to neither pay for the lost unit sales nor cover the promotion’s cost. However, for higher levels of cross price effects, HJP boosts demand and although it might still lead to lower retailers’ profits, it will increase the manufacturers’ and the total channel’s profits. Manufacturers supplying products to decentralized retailers might lose from HJP. However, when that is the case, retailers do not have an incentive to invest in such a promotion. On the opposite, when manufacturers benefit from HJP, retailers could, in most cases, implement the HJP promotion even if they lose profits because the total channel profits are improved.