Marketing partnerships may involve either horizontal relationships (e.g., a co-marketing alliance between firms selling different products) or vertical relationships (e.g., between an upstream manufacturer and its downstream retailers). Either type of partnership often includes multiple members and the marketing efforts (e.g., level of advertising) of any member typically affect the profitability of the other members. When selecting their effort levels, however, the individual members of the partnership do not account for such externalities. Consequently, the overall effort on behalf of the partnership is not optimal. This dissertation investigates the value of contractual mechanisms such as monitoring schemes (for horizontal partnerships) and cooperative advertising programs (for vertical partnerships) that may provide better incentives to the partners to invest into the relationship. The first part of this dissertation focuses on horizontal marketing partnerships and examines the relative effectiveness of outcome- and action-based contracts in providing the alliance partners with the incentives to invest appropriately. A mathematical model is developed in which a focal firm (e.g., Sony) contracts with two partners (e.g., McDonald's and Old Navy), when each of these partners is privately informed about the impact of the alliance on its demand. The analysis evaluates the strengths and weaknesses of outcome- (or output-) and action- (or input-) based contracts in several settings including those with no demand externality, a positive externality and a negative externality. The analysis shows that when there is (a) no externality, (b) negative externality, or (c) a relatively weak positive externality, there is a strict preference for output-based contracts; that preference, however, is reversed with a sufficiently strong positive externality. The rationale for these findings, along with the implications and directions for further work are discussed. The second part of this dissertation focuses on a vertical marketing relationship where multiple retailers sell the products from a common manufacturer. Here, each retailer's level of advertising affects the demand for the other retailers. This positive externality, however, allows any retailer to free-ride on the other retailers' efforts and leads to an overall reduction in the level of advertising by all the retailers. In this context, a manufacturer can use a cooperative advertising contract to reimburse part of the advertising expenses of its retailers in order to induce them to raise their levels of advertising. Observed terms in a cooperative advertising contract include either a participation rate, a participation rate and a variable accrual rate, or a participation rate and a fixed accrual rate. This dissertation analyzes the relative effectiveness of the above three types of cooperative advertising contracts in minimizing or eliminating the free-riding problem. More specifically, a mathematical model is developed to analyze the relative impact of these contractual terms when the downstream retailers face either symmetric or asymmetric demand and cost structures. The analysis shows that with symmetric retailers, the three types of contracts are equally effective. With asymmetric retailers, though, including some form of accrual stipulations typically adds value to a contract that specifies only a participation rate. Further, using a variable accrual stipulation may be preferred to the fixed accrual stipulation under certain conditions and vice versa. The two types of accrual stipulations affect retail prices and efforts in distinct ways and these differences may tip the scale in favor of one contract versus the other under the appropriate circumstances. These conditions and the intuition behind the results are discussed. Overall, this dissertation contributes to the literature on horizontal and vertical marketing relationships and enhances our understanding of distinct contractual mechanisms that can help align the actions of various members involved in such partnerships.
Doctor of Philosophy (Ph.D.)
College of Business Administration
Length of Campus-only Access
Doctoral Dissertation (Open Access)
Chennamaneni, Pavan, "Marketing Partnerships: Impact of Monitoring Schemes and Cooperative Advertising Agreements" (2009). Electronic Theses and Dissertations. 6114.