Dynamic Cooperative Strategies in Search Engine Advertising Market: With and Without Retail Competition

TL;DR

This paper models and analyzes cooperative advertising strategies in the search engine advertising market, considering dynamic quality scores, competition, and finite time horizons to provide managerial insights.

Contribution

It introduces a novel cooperative advertising optimization model for SEA, incorporating dynamic quality scores and competition, with equilibrium solutions and sensitivity analyses.

Findings

Cooperative strategies are significantly affected by market competition.

Dynamic quality scores influence optimal advertising policies.

Retail competition alters the effectiveness of cooperative advertising.

Abstract

In search engine advertising (SEA) market, where competition among retailers is intense and multifaceted, channel coordination between retailers and manufacturers emerges as a critical factor, which significantly influences the effectiveness of advertising strategies. This research attempts to provide managerial guidelines for cooperative advertising in the SEA context by modeling two cooperative advertising decision scenarios. Scenario I defines a simple cooperative channel consisting of one manufacturer and one retailer. In Scenario II, we consider a more general setting where there is an independent retailer who competes with the Manufacturer-Retailer alliance in Scenario I. We propose a novel cooperative advertising optimization model, wherein a manufacturer can advertise product directly through SEA campaigns and indirectly by subsidizing its retailer. To highlight the distinctive features of SEA, our model incorporates dynamic quality scores and focuses on a finite time horizon. In each scenario, we provide a feasible equilibrium solution of optimal policies for all members. Subsequently, we conduct numerical experiments to perform sensitivity analysis for both the quality score and gross margin. Additionally, we explore the impact of the initial market share of the competing retailer in Scenario II. Finally, we investigate how retail competition affects the cooperative alliance's optimal strategy and channel performance. Our identified properties derived from the equilibrium and numerical analyses offer crucial insights for participants engaged in cooperative advertising within the SEA market.