The cost bearing mechanism for advertising in a capital-constrained supply chain

Abstract

With rising market competition, increasing numbers of firms are launching advertising to attract customers and promote product sales. The increase in operating costs caused by advertising places greater pressure on small retail businesses that are prone to capital shortages, leading them to seek financing from upstream firms. However, in the financing process, upstream and downstream firms may not be able to acquire all of one another’s real information, which inevitably has a significant impact on their operating strategies. By constructing a Stackelberg game, this paper studies the effects of information asymmetry on the retailer’s initial capital and the manufacturer’s financing rate on their advertising strategies. We find that in the symmetric information scenario, when the advertising cost coefficient is low, manufacturer advertising is the superior strategy and increases the retailer’s and manufacturer’s profits and social welfare; when it is moderate, retailer advertising is the superior policy; but when it is high, retailer advertising is more beneficial for the manufacturer’s profit and social welfare but is more unfavorable for the retailer’s profit. In addition, information asymmetry on the manufacturer’s financing rate affects the advertising strategies of the manufacturer and the retailer, but information asymmetry on the retailer’s initial capital fails. Additionally, we further extend the model to the Nash game scenario and cooperative advertising scenario and draw some different conclusions. This study contributes to the literature by analyzing the advertising strategies of the retailer and the manufacturer with asymmetric financing information, and guides the design of advertising strategies for companies in practice.