Optimizing Consumer Advertising, Intermediary Advertising and Markup in a Vertical Market Structure

Abstract

Given is a vertical market structure (VMS) which consists of producers, one intermediary level and consumers. In most of the literature on VMS either equilibrium behavior is studied without consideration of objectives or some objective function is being optimized without taking into account behavior of intermediaries. This paper is a modest attempt to bring the two approaches together. The decision variables are consumer advertising, intermediary advertising and markup offered by producers to intermediaries. Behavior of intermediaries is incorporated through the use of a pseudodecision variable, the equilibrium number of middlemen in the VMS.