Faculty Publications (FBIT)
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Browsing Faculty Publications (FBIT) by Subject "Game theory"
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Item Assessing the profitability of cooperative advertising programs in competing channels(Elsevier, 2017-02) Karray, Salma; Martin-Herran, Guiomar; Zaccour, GeorgesA large literature studied the profitability (effectiveness) of cooperative advertising programs (CAPs) in distribution channels, but very few studies modeled pricing decisions in competitive markets under different channel structures. This paper fills this gap. We propose a game-theoretic model where two competing channels make pricing and promotional decisions. The efectiveness of CAPs is studied under different channel structures to examine how vertical and horizontal externalities can impact the effectiveness of CAPs. Each channel structure can be integrated or decentralized to account for different vertical interaction effects, resulting in three cases: (i) both channels are decentralized (DD), (ii) both are integrated (II), and (iii) a hybrid structure where one channel is decentralized and is competing with an integrated channel (DI). We solve six non-cooperative games: (1) both manufacturers offer CAPs under DD, (2) only one manufacturer offers a CAP under DD, (3) both manufacturers do not offer CAPs under DD, (4) the decentralized manufacturer offers a CAP under DI, (5) the decentralized manufacturer does not offer a CAP under DI, and (6) the channel problem under II. Then, we obtain and compare equilibrium profits and strategies across these games. The main results indicate that the profitability of CAPs depends on the levels of price competition and of the advertising effects. Also, while manufacturers benefit from CAPs, retailers may not find such programs profitable. Finally, the decentralized or integrated structure of the competing channel significantly impacts the effects of cooperative advertising. For example, CAPs can effectively coordinate the DD channel and even help it exceed profits earned by a vertically integrated channel. However, in the DI case, although CAPs can improve total channel profits, they do not fully coordinate the channel.Item ‘Buy n times, get one free’ loyalty cards: Are they profitable for competing firms? A game theoretic analysis(2017-08-10) Bazargan, Amirhossein; Karray, Salma; Zolfaghari, SaeedThis paper evaluates whether firms offering loyalty programs (LPs) should choose a restricted redemption policy by imposing a specific number of purchases before customers can redeem their points. Such restriction is commonly offered in form of ‘buy n times, get one free’ loyalty cards. We develop a multinomial logit model where consumer's utility depends on the value of the product and of the rewards. Using an iterative algorithm, we numerically solve a Nash game for two firms offering loyalty programs. Optimal strategies and profits are obtained for three different scenarios (games): (1) both firms do not restrict redemption; (2) both firms restrict redemption; and (3) only one firm restricts redemption while the other firm does not. Our main findings indicate that each firm's optimal strategies are significantly affected by whether the competitor decides to restrict or not to restrict redemption. In particular, a firm that restricts reward redemption should offer a higher price if its competitor also restricts redemption. Further, the dominant strategy of the game depends on customers’ valuations of time and rewards. For example, when customers highly value time but do not highly value rewards, the dominant strategy for both firms is not to restrict redemption. Alternatively, firms can face a Prisoner dilemma situation leading to unrestricted redemption policy for intermediate levels of customer valuation of both time and rewards.Item Cooperative advertising programs: are accrual constraints necessary?(Wiley, 2017-06) Punya, Chattergee; Salma, Karray; Simon Pierre, SigueThis paper investigates how the use of an accrual constraint in a cooperative advertising program affects channel members’ profits in a bilateral monopoly, as well as their pricing and advertising decisions. The main findings indicate that, compared to unconstrained cooperative advertising programs, when an accrual constraint is used and the manufacturer’s contribution to the retailer’s advertising costs exceeds the accrued cooperative advertising budget, the retailer reduces both her retail price and advertising efforts to the level where cooperative advertising is not offered; while the manufacturer also reduces his wholesale price and advertising efforts, but this time, the wholesale price remains higher than when there is no cooperative advertising. These strategic moves translate to less (more) profits for the manufacturer (retailer). The use of an accrual constraint is counterproductive for the manufacturer as the retailer uses the accrued advertising fund as a side payment rather than a direct incentive to invest more in advertising. The manufacturer and retailer are better off when unconstrained cooperative advertising programs are supplemented with other incentives, including side payments and advertising support services.Item Modeling reward expiry for loyalty programs in a competitive market(2017-08-10) Bazargan, Amirhossein; Karray, Salma; Zolfaghari, SaeedThis paper investigates reward expiry for loyalty programs. It provides insights into the profitability of setting reward expiry for competing firms and identifies conditions under which such a policy would be beneficial. We develop and solve a game-theoretic model that reflects consumer behavior in choosing products and redeeming rewards. Applying a new iterative algorithm, we get the Nash equilibrium outputs for three scenarios (games): (1) neither firm sets an expiry date, (2) both firms set an expiry date, and (3) only one firm sets an expiry date. Comparison of the firms' profits across scenarios shows that the firms' prices and profits are affected by the loyalty program of the competing firm and by consumers' valuation of rewards and of time to rewards. In particular, a firm offering rewards that do not expire should increase its price if the competing firm changes its reward policy from no expiry to expiry, even when the expiry period is quite long. Finally, when customers highly value rewards and time, reward expiry is a dominant strategy for both firms. This means that firms would benefit from setting expiry on their loyalty rewards only if their customers highly value both rewards and time. Alternatively, both firms' rewards should not expire if consumers have low valuations of both rewards and time.