Advertising and price competition in a manufacturer-retailer channel

We investigate how manufacturers’ advertising competition, when advertising has a dynamic impact on the goodwill that affects market demand, interacts with the price competition in a manufacturer-retailer channel. Specifically, we examine the strategic choices made by manufacturers, the role of the retailer in exacerbating or mitigating competition among manufacturers, the total channel profit and how that is split among the different players. Using prices, sales, and advertising data in the laundry detergent category we find that advertising and pricing are strategic complements as manufacturer advertising increases the price elasticity of demand; advertising competition intensifies price competition but it also improves the profitability of manufacturers; the presence of retailers in the channel leads to increased advertising spending while mitigating the extent of price competition. Manufacturers can enjoy a higher profit from using retailers when they compete in both price and advertising. Finally, we show that the emergence of ecommerce, which enables manufacturers directly selling to end consumers, has asymmetric profit impacts on manufacturers, as brands with lower cost and lower brand goodwill are more benefited from ecommerce.