To share or not to share: the optimal advertising effort with asymmetric advertising effectiveness

In this paper, we study a two-stage model in which a manufacturer expands to a new market through a local retailer and has private information on the advertising effectiveness. The manufacturer chooses the information sharing format with the retailer, either no information sharing or mandatory information sharing. Under no information sharing format, the manufacturer and the retailer play a signaling game. We derive both separating and pooling equilibria and conduct equilibrium refinements for the signaling game. Under mandatory information sharing format, the manufacturer simply informs the retailer the advertising effectiveness. We also establish the stylized model and derive the optimal advertising effort. By comparing the manufacturer’s ex ante profit under the two information sharing formats, we find that the manufacturer always prefers mandatory information sharing, under which both the advertising effort and profit can be higher. We also observe that unlike the common case that the channel members may have different preference over the information sharing formats, the manufacturer and the retailer can actually achieve alignment. While some previous studies suggest that the manufacturer and the retailer may have different preference over the information sharing formats, we find that they can actually achieve alignment with asymmetric information on advertising effectiveness.