Comarketing Alliances: Should You Contract on Actions or Outcomes?

    Authors

    P. R. Chennamaneni;R. Desiraju

    Comments

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    Abbreviated Journal Title

    Manage. Sci.

    Keywords

    comarketing alliances; marketing externality; information asymmetry; input versus output monitoring; CO-MARKETING ALLIANCES; INCENTIVE CONTRACTS; INFORMATION; CHANNEL; DESIGN; INPUT; PRICE; Management; Operations Research & Management Science

    Abstract

    Comarketing alliances often involve multiple partners, and a given partner's marketing efforts on behalf of the alliance can indirectly affect the demand of the other partners. Individual partners, however, can ignore the effects of such an externality and invest suboptimally to the detriment of the alliance. This paper examines the relative effectiveness of outcome-and action-based contracts in providing the alliance partners with the incentives to invest appropriately. We develop a mathematical model 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. Our analysis evaluates the strengths and weaknesses of outcome- (or output-) and action-based (or input-based) contracts in settings with varying levels of the demand externality. We find that when there is either no externality or 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. This paper explains the underlying rationale for these findings.

    Journal Title

    Management Science

    Volume

    57

    Issue/Number

    4

    Publication Date

    1-1-2011

    Document Type

    Article

    Language

    English

    First Page

    752

    Last Page

    762

    WOS Identifier

    WOS:000289404200010

    ISSN

    0025-1909

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