Optimal Co-Operative Advertising Decisions in Direct-Mail Operations

Abstract

This paper considers optimization of vertical co-operative promotion decisions in a direct mail operation. After presenting our model, we demonstrate that it is likely that a vertical co-operative direct mail promotional effort can result in a situation in which both the direct mailer and the manufacturer increase profits, compared with the situation where the direct mailer makes ‘optimal’ direct mail decisions without regard to any involvement with the manufacturer. We next show that the manufacturer can optimize his own profitability by agreeing to a specific (quantitatively determined) contribution to mail order costs. Finally, we illustrate how the manufacturer and direct mailer can co-operate (move away from their individual optimal decision variables), reaching an integrative, rather than a distributive solution, and jointly set the values of these decision variables, so that the total profit generated by the operation is higher than the sum of the individual profits of the two parties.