A Study of Manufacturer - Retailer Marketing Strategies: A Differential Game Approach

This paper provides an application of differential games to determine marketing expenditure strategies for channel members in a two-member channel. Assuming that each channel member maximizes individual profits, we determine the closed-loop equilibrium strategies for marketing effort over time for both members by explicitly recognizing that each member's decisions are affected by the other's actions. To account for this interdependence in the decisions of the manufacturer and the retailer, channel sales are directly related to the marketing efforts of channel members. Our results show that the optimal effort levels of the channel members are constant over time. We also compare these results with the case where the channel members determine their optimal effort strategies by maximizing total channel profits rather than individual profits. In this case, though total channel profits will be higher, we show that channel members expend greater effort on marketing expenditures.