Omega 98 (2021) 102104

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Omega
journal homepage: www.elsevier.com/locate/omega

Horizontal cooperative advertising with advertising threshold effects ✩

Lili Yu a, Xiuli He b, Juan Zhang c, Chuanyong Xu a,∗
a
School of Management, University of Science and Technology of China, Hefei, Anhui, 230026, PR China
b
Belk College of Business, University of North Carolina at Charlotte, Charlotte, North Carolina, NC28223, USA
c
Business School, Hohai University, Nanjing, Jiangsu, 210098, PR China

a r t i c l e i n f o a b s t r a c t

Article history: The advertising threshold effect, which implies that advertising has little effect on sales if the level of
Received 20 March 2018 advertising is below a certain level, has seldom been addressed in a modeling context. Inspired by the
Accepted 15 August 2019
practice of horizontal cooperative advertising (HCA), this paper attempts to investigate the advertising
Available online 19 August 2019
threshold effect in a horizontal context and to explore the value of HCA programs. To investigate the ad-
Keywords: vertising threshold effect in a horizontal context, we develop several advertising and pricing models that
Cooperative advertising involve two horizontally related firms, where the advertising threshold effect is formulated by a two-
Advertising threshold effect regime sales function. We first consider the monopoly case and then extend it to a duopoly case. We fur-
Game theory ther consider two HCA programs to explore the value of such programs, in which the firms share adver-
Marketing-operations interface tising expenditures to reduce their advertising cost. The findings include the following: (i) The presence
of an advertising threshold can lead to sub-optimal advertising decisions. (ii) If one firm is influenced
by the advertising threshold, this influence may be passed to its competitor. (iii) Although cooperative
advertising is less cost effective than individual brand advertising, firms can benefit from HCA programs
only when the advertising threshold is neither too high nor too low, and the synergy effect of cooperative
advertising is not too low.
© 2019 Published by Elsevier Ltd.

1. Introduction “regimes” in only one of which advertising is effective, Vakratsas

For firms with a product/service to sell, advertising is crucial.
It is widely used for developing brand image [25], building con-
sumer goodwill, or persuading consumers to purchase [9,28]. It is
especially important for growing firms or firms introducing new
products, as customers are not familiar with such brands or prod-
ucts. However, investment in advertising does not always produce
sufficient return. As Adachi and Liu [1] noted, in their examination
of the relationship between the level of advertising and demand
for generic fluid milk, advertising investment is only effective once
it reaches a certain level.
The advertising threshold effect, which implies that advertis-
ing has little effect if it is below a certain level, has been proved
by many marketing researchers and practitioners. For instance,
based on monthly time-series and cross-sectional data in a con-
sumer market, Bemmaor [5] utilized an alternative econometric
model and proved that the advertising threshold effect does ex-
ist. In another study using a switching regression model with two
✩
This manuscript was processed by Associate Editor AE M. Fry.
∗
Corresponding author.
E-mail addresses: lizi121@mail.ustc.edu.cn (L. Yu), xhe8@uncc.edu (X. He),
hhuzhang@hhu.edu.cn (J. Zhang), xcy@ustc.edu.cn (C. Xu).
et al. [29] provided strong support for the existence of threshold
effects.
However recent studies on advertising decision-making do not
take account for the advertising threshold effect. In this paper, we
investigate the impacts of the advertising threshold effect on firm’s
decisions, especially for small or new firms. Furthermore, we at-
tempt to explore the means of alleviating advertising threshold ef-
fects. Specifically, inspired by industry practice, we propose two
horizontal cooperative advertising (HCA) programs. One is a joint
advertising program in which two firms invest in one advertis-
ing with two brands, where the two brands share the advertising
space and the advertising effect. The other is a common brand pro-
gram or brand sharing program in which the firms share a com-
mon brand name. In both scenarios, one firm determines the ad-
vertising participation rate first, and then the other determines the
advertising level for the advertising program.
Joint advertising and brand sharing advertising programs are
common approaches in practice. A joint advertising program is
a strategic marketing and advertising partnership between two
brands wherein the success of one brand brings success to its part-
ner brand. It is an effective way to build business, boost aware-
ness, and break into new markets. For example, in April 2017,
two competitive retailing platforms, Tmall (tmall.com) and Suning

https://doi.org/10.1016/j.omega.2019.08.011
0305-0483/© 2019 Published by Elsevier Ltd.
2 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104
(suning.com), jointly invested in an advertising campaign, “Mall-
Ning”, which brought much consumer flow to both platforms. The
brand sharing advertising program provides another way to over-
come the advertising threshold, where the firms may or may not
be in the same industry. For example, in 2001, 18 medium-sized
taxi companies in Shanghai formed and shared a common “Blue
Alliance” brand to compete with five other famous companies in
the same city. Many fashion apparel companies in Shishi and Jin-
jiang in China have shared a common brand and advertised to-
gether to increase their sales over the past two decades.
Based on these observations, we are interested in the following
questions. First, what is the impact of advertising threshold effect
on a firm’s advertising and pricing decisions? Second, what is the
impact of advertising threshold effect on horizontal related firms,
which may offer substitutive or complementary products? Third,
what is the value of HCA programs when the advertising thresh-
old effect is present? Whether and when can they benefit from
such programs and how? To answer these questions, we develop
several advertising and pricing models. In the models, the adver-
tising threshold effect is incorporated through a two-regime sales
response function. To understand the impact of the threshold effect
in a horizontal context, we consider a monopoly case then extend
it to a duopoly case. The impact of advertising threshold transfers
to the other firm even if the latter is not affected directly. Then, we
explore the value of HCA programs. We consider a joint advertising
program with two brands in one advertisement, and a brand shar-
ing advertising program where two firms share a common brand.
We identify the value of the HCA programs comparing their out-
comes with those of the duopoly case.
The findings reveal the impacts of the advertising threshold and
the value of HCA programs. First, when the advertising threshold
effect is present, the level of investment in advertising may be sub-
optimal in both the monopoly case and duopoly case. Second, in
the duopoly scenario, if either firm is affected by the advertising
threshold effect, then the other will also be influenced indirectly.
Third, under HCA programs, both firms can benefit from the HCA
programs only when the advertising threshold is neither too high
nor too low, and the synergy effect is not too low. That is to say,
a cooperative advertising with brand A+B should be more effective
than advertised separately, otherwise the cooperative advertising
program is less likely to occur.
This paper contributes to the literature in the following aspects.
First, it is among the few papers that incorporate the advertising
threshold effect into cooperative advertising programs. Gou et al.
[15] proposed the first vertical cooperative advertising model with
advertising threshold effects. This paper differs from their contri-
bution by considering the horizontal advertising cooperation. Sec-
ond, this paper is among the first to reveal the impacts of the ad-
vertising threshold effect on horizontal firms. This paper identifies
the value of HCA programs, which suggests that HCA helps to over-
come the advertising threshold.
The remainder of this paper is organized as follows.
Section 2 reviews the related literature. We study a monopoly
scenario in Section 3 and then extend it to a duopoly scenario
in Section 4. In Section 5, we investigate two HCA programs and
explore their value. In Section 6, we illustrate our results using
numerical analysis. Section 7 concludes our findings and discusses
directions for future research.
2. Literature review
Our paper has a close connection to two streams of literature:
those on the advertising threshold effect and those on cooperative
advertising programs.
Recent works on decision-making in advertising fail to account
for the advertising threshold effect despite its existence having
been proven. The literature on the advertising threshold effect is
mainly empirical and focuses primarily on testing and demon-
strating the existence of the advertising threshold effect. From the
perspective of the behavioral psychology, Greenberg and Suttoni
[16] suggested that there may be a threshold effect in the sales
response to advertising. In subsequent works, Lambin [22], Corkin-
dale and Newall [12] and Adachi and Liu [1] proved the existence
of an advertising threshold by using different approaches. Utiliz-
ing the two-regime market share model, Bemmaor [5] tested for
the existence of a cutoff point and found that advertising has little
effect when its level is below the cutoff. Addressing the question
of how to formulate a sales response model when considering the
advertising threshold effect, Johansson [20] argues for modeling
the advertising sales response function as an “S-curve”. Based on
Johansson’s work, Vakratsas et al. [29] proposed a switching re-
gression model with two “regimes” to revisit this “S-curve” in a
probabilistic manner. These studies serve as the basis for this pa-
per. We adapted Beammor’s model to characterize the sales re-
sponse function.
Although the literature has proven the existence of the adver-
tising threshold effect, few studies account for it. One exception is
[15], who considered the advertising threshold effect in their de-
mand models of a vertical supply chain, using an S-shaped adver-
tising response model. However, it is also important to investigate
the impacts of the advertising threshold effect on advertising de-
cisions when two firms compete in a market, especially for small
and medium-sized enterprises (SMEs) that suffer from the adver-
tising threshold effect. In contrast to [15], we incorporate the ad-
vertising threshold effect into a model involving two competing
firms and propose HCA programs to alleviate the effect.
Our paper is also related to the literature on cooperative ad-
vertising. Vertical cooperative advertising is the most common
application of cooperative advertising, which describes a finan-
cial agreement whereby a manufacturer offers a subsidy to its
retailer by sharing the latter’s advertising costs [6,7,17,18,31,34].
In this stream, Huang and Li [18] and Li et al. [24] initi-
ated the framework of national advertising and local advertis-
ing. Readers can refer to Aust and Buscher [3] and Jørgensen and
Zaccour [19] for excellent review on cooperative advertising mod-
els. Recently, researchers have incorporated findings on the sup-
ply chain into the cooperative adverting program, such as fair-
ness concerns, channel conflict, reference prices, and accrual rates
[11,32,33,35,36]. In contrast to such vertical settings, we investigate
cooperative advertising in a horizontal market structure.
The literature on HCA programs is closely related to this study.
HCAs entail collaboration on advertising by firms belonging to
the same echelon of the supply chain [3]. Generic advertising is
an example of HCAs, which are most commonly applied in the
farming and agricultural sector [10,13]. Generic advertising is not
intended to promote a particular brand but a particular product
category [4], and any firm’s advertising will also increase the sales
of other firms. Thus free-riding becomes a major concern [26].
In addition to generic advertising, the literature on horizontal ad-
vertising generally employs models with two branches. The first
branch considers two or more firms that launch a cooperative
advertising campaign for their own brands and share the total ad-
vertising costs. For example, Varadarajan [30] considered a joint
promotions strategy in which two or more firms or brands jointly
conduct promotional activities through advertisements, which lead
to a better promotion effect with lower advertising costs. Karray
and Sigué [21] studied the optimal selection of promotional part-
ners in a market with three horizontal firms where two firms sell
complementary products and a third firm sells an independent
product.
The second branch considers two or more firms combine
resources to create a common brand, and advertising decision
 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104
makers use the firms’ advantages to form a advertising content
to promote the common brand [23]. Samu et al. [27] investigated
the effectiveness of advertising alliances involving two brands from
different product categories and cooperative investment in adver-
tising to introduce new brands. Gou et al. [14] considered a sim-
ilar scenario with brand extension, and their results showed that
for horizontal advertising cooperation programs, the contractual al-
liance dominates the joint venture for most profit-sharing patterns.
Following works that consider these two branches, our paper ex-
tends the literature on HCA programs by considering the advertis-
ing threshold effect, and we propose two HCA programs to over-
come the constraint of the advertising threshold: one is a joint ad-
vertising program in which two firms cooperate in advertising for
two brands, and the other is a brand sharing advertising program
in which two firms share a common brand.
3. The monopoly scenario
In this section, we consider the situation in which there is only
a monopolist in the market to determine the basic impacts of
the advertising threshold. The monopolist faces a given advertis-
ing threshold K( ≥ 0). That is, the advertising has no effect on sales
when the advertising effort u is lower than K. To reflect such a
phenomenon, we assume that the sales function is
S(u, p) = a − bp + γ δ (u ),
where δ (u) is defined as
 monopolist’s advertising and pricing decisions are to be affected
0, if u < K,
δ (u ) =
u, if u ≥ K.
In Eq. (1), a > 0 is the potential market size, p > 0 is the re-
tail price, b > 0 measures consumer sensitivity to the retail price,
and γ > 0 is the efficiency of advertisement (when it takes effect).
The expression δ (u) implies that advertising has no effect on sales
when u < K. Note that Eq. (1) not only captures the advertising
threshold effect but also reflects the fact the sales decrease in the
retail price p.
We assume the advertising cost has a quadratic relationship
with the advertising level u to characterize the decreasing marginal
effect of advertising, i.e., C (u ) = u2 /2. Such an assumption has of-
ten been utilized in previous advertising studies, and readers may
refer to Zhang et al. [37]. For brevity, we normalize the marginal
production cost to zero. Then, the monopolist’s profit function is
u2
π ( p, u ) = p[a − bp + γ δ (u )] − . (3)
2 which measures the maximum profit loss ratio when the advertis-
The monopolist determines its advertising level u and retail price
p simultaneously
√ to maximize its profit. Note that we assume that
0 < γ < 2b throughout this paper to rule out the case of infinite
advertising and retail price which is not possible in practice. The
monopolist’s optimal decision is given in the following proposition.
Proposition 1. The monopolist’s optimal advertising level and retail
price are
 aγ
2b−γ 2
if 0 ≤ K ≤ u0M
u∗M = K if u0M < K < 2u0M
0 if K ≥ 2u0M
and
⎧ a
⎨ 2b−γ 2 if 0 ≤ K ≤ u0M
p∗M = a+γ K
if u0M < K < 2u0M
⎩ a 2b if K ≥ 2u0M ,
2b
respectively, where u0M = aγ /(2b − γ 2 ). Its profit is
⎧ a2
⎨ 2(2b−γ 2 ) if 0 ≤ K ≤ u0M
π =
∗ ( a+γ K )2
− 1 2
K if u0M < K < 2u0M
M
⎩ a2 4b 2 to keep the results parsimonious. Moreover, accounting for advertising competition
4b
if K ≥ 2u0M .
3
Proposition 1 shows that as the advertising threshold K varies,
the monopolist’s advertising decision falls into three different
regimes, named the “unrestricted regime”, “partially restricted
regime”, and “restricted regime”. Under the “unrestricted regime”,
where the advertising threshold is very low (K < u0M ), the monop-
olist’s decisions are identical to those when the advertising thresh-
old effect does not exist. Under the “partially restricted regime”,
where the advertising threshold is moderate, i.e., u0M ≤ K < 2u0M ,
the monopolist exerts greater advertising effort than optimal to
meet the threshold. Under the “restricted regime”, where the ad-
vertising threshold is very high and surpassing the threshold is
very costly (K ≥ 2u0M ), the monopolist chooses to invest nothing in
advertising.
Thus, a firm influenced by the advertising threshold may over-
or under-invest in advertising, relative to the optimal advertising
level when the advertising threshold is absent, depending on the
level of the advertising threshold. The selling price follows the
same pattern as the advertising level, increasing under the partially
restricted regime and dropping directly to a lower level under the
restricted regime. The inefficiency caused by the threshold effect is
increasing, while the reason for this may vary.
The impact of the advertising threshold effect on the monopo-
list’s decisions is illustrated in Fig. 1. In this figure, K varies from 0
to 100 while the other parameters are fixed at a = 100, b = 2 and
(1) γ = 1.
For a given threshold K, the smaller u0M is, the more likely the
by the advertising threshold. Noting that ∂ u0M /∂ a > 0, ∂ u0M /∂ γ > 0,
(2)
and ∂ u0M /∂ b < 0, we find the following: (i) when the potential
market size is smaller or the consumer is more sensitive to price,
the monopolist is more likely to be affected by the advertising
threshold, and (ii) the advertising threshold is more likely to influ-
ence the firm’s decision when advertising efficiency is low. In prac-
tice, SMEs usually have a relatively small potential market size and
their sales are sensitive to price. Our results here show that firms
with such characteristics are more likely to be influenced by the
advertising threshold effect. This result explains why SMEs usually
have to spend a larger share of their total cost on advertising com-
pared with large enterprises [22].
Finally, to characterize the extent to which the system is af-
fected by the threshold effect, we define
a2 /4b γ2
σ =1− = ,
a2 /2 ( 2b − γ ) 2b
2
ing threshold takes effect. Noting that σ increases in γ and de-
creases in b, we know that when consumers are more sensitive to
advertising but less so to price, the total efficiency loss is higher.
4. The duopoly scenario
In this section, we consider two firms selling substitute prod-
ucts in the same market, to explore the impact of the advertising
threshold effect across horizontal firms. Denote the advertising lev-
(4)
els as ui and the retail prices as pi (i = 1, 2). We assume that the
sales of the products are given by1
Si = ai + γ δ (ui ) − bpi + θ ( p3−i − pi ), (7)
(5)
1
An alternative model is Si = ai + γ δ (ui ) − bpi + θ1 ( p3−i − pi ) − θ2 (δ (u3−i ) −
δ (ui )). However, we do not consider advertising competition for the following rea-
sons. First, a firm’s advertising will not always decrease the sales of its competi-
tors. Specifically, when the market is far from saturated, advertising competition
can usually be ignored [2]. Second, since our main focus is not advertising com-
petition but the advertising threshold effect, ignoring the former is a useful way
(6)
does not affect our main conclusions.
4 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104

(a) Advertising Level (b) Price and Profit

profit

advertising
level

price
0

partially partially
unrestricted restricted unrestricted restricted
restricted restricted

0 uM0 2um0 0 uM0 2um0

advertising threshold K advertising threshold K

Fig. 1. The monopoly case with threshold effect.

where the function δ (ui ) the parameters ai , b and γ have the same Proposition 2. Given the advertising level u3−i and retail price p3−i
meaning as in Section 3. of firm 3 − i(i = 1, 2), the best response functions of firm i are
Noting the symmetric structure of the problem, we assume that
ui (u3−i , p3−i )
a1 ≥ a2 . The newly introduced parameter θ reflects the substitution ⎧
effect between the two products. A high θ implies a high degree of ⎪ γ (ai + θ p3−i ) γ (ai + θ p3−i )
⎪
⎪ if K ≤
price competition. The special case of θ = 0 means that the sales ⎪
⎨ 2 k − γ 2 2k − γ 2
γ (ai + θ p3−i ) 2γ (ai + θ p3−i )
of the two products are independent of each other, wherein the = K if <K< (11)
⎪
⎪ 2k − γ 2 2k − γ 2
decision of either firm will be the same as in Section 3. The model ⎪
⎪ 2γ (ai + θ p3−i )
⎩0 if K ≥
may also capture the case when the products are complementary, 2k − γ 2
by setting θ < 0. For brevity, we consider only the case of θ > 0 in
this section. and
Despite our implicit assumption that the two firms face the pi (u3−i , p3−i )
same advertising threshold, we should note that such an assump- ⎧
⎪ ai + θ p3−i γ (ai + θ p3−i )
tion is not made simply for brevity. In practice, to guarantee na- ⎪
⎪ if K ≤
⎨ 2k − γ
⎪ 2k − γ 2
2
tional coverage, advertisers need to reach a certain threshold of ai + γ K + θ p3−i γ (ai + θ p3−i ) 2γ (ai + θ p3−i )
= if <K< , (12)
advertising spending. As described by Brierley [8], during the early ⎪
⎪ 2k 2k − γ 2 2k − γ 2
⎪
1990s in the United Kingdom, the spending threshold was approx- ⎩ ai + θ p3−i
⎪ if K ≥
2γ (ai + θ p3−i )
imately £70 0,0 0 0 for a TV campaign and £20 0,0 0 0 for a national 2k 2k − γ 2
poster campaign. When two firms belong to the same country or
Then, differentiating ui (u3−i , p3−i ) and pi (u3−i , p3−i ) with re-
area, their advertising thresholds would most likely be the same.
spect to p3−i we have
Let k = b + θ ; then, Eq. (7) becomes  θγ
∂ ui (u3−i , p3−i ) if ui > K
Si = ai + γ δ (ui ) − kpi + θ p3−i . (8) = 2 k 2 −γ 2
∂ p3−i 0 if ui ≤ K
Obviously, θ < k since b is positive. and
As in Section 3, we assume that the advertising cost is quadratic  θ
in the advertising effort ui , i.e., C (ui ) = u2i /2, and the unit produc-
∂ pi (u3−i , p3−i ) 2 k −γ 2
if ui > K
=
tion cost is zero for simplicity. Then, their profits are given by ∂ p3−i θ
2k
if ui ≤ K,

u2i respectively. Then, we have ∂ ui (u3−i , p3−i )/∂ p3−i ≥ 0 and

πi = p i S i − , (9) ∂ pi (u3−i , p3−i )/∂ p3−i > 0. These two expressions indicate that
2
a firm will increase its advertising expenditure and retail price
and the total profit of the two firms is when the retail price of its rival increases.
Simultaneously solving the best response functions of both
u21 + u22
π = p1 S1 + p2 S2 − . (10) firms, we can obtain the Nash equilibria stated in the following
2 proposition.
Since both firms determine their advertising levels and retail
Proposition 3. Under the duopoly scenario, the equilibria are shown
prices simultaneously to maximize their profits in Eq. (9), this is
in Table 1, and for each equilibrium, the necessary conditions are
a non-cooperative game. First, we characterize the best response
given in Table 2.
functions of both firms. Given the decisions of firm 3 − i, i.e., u3−i
and p3−i , the best response functions of firm i (i = 1, 2) are speci- Proposition 3 shows the advertising decision of each firm still
fied by Proposition 2. falls into three regimes: un-restricted, partially restricted, and
 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104 5

Table 1
The equilibrium solutions under the duopoly scenario.

Firm 1/Firm 2 Un-restricted Partially restricted Restricted

γ )a1 +θ a2
p∗N1 = (2(2k−
2
2ka1 +θ (a2 +K ) 2ka1 +θ a2
k −γ 2 ) 2 −θ 2 p∗N1 = 2 k ( 2 k −γ 2 ) −θ 2
p∗N1 = 2 k ( 2 k −γ 2 ) −θ 2
γ 2 )a2 +θ a1
p∗N2 = (2(2k− (2k−γ 2 )(a2 +γ K )+θ a1
p∗N2 = (22kk(−2γk−γ)a22)+−θθa21
2
k −γ 2 ) 2 −θ 2 p∗N2 = 2 k ( 2 k −γ 2 ) −θ 2
Un-restricted
u∗N1 = γ [((22kk−−γγ 2))a21−+θθ2a2 ] γ (2ka1 +θ (a2 +γ K ) γ (2ka1 +θ a2 )
2
∗
u∗N1 = 2 k ( 2 k −γ 2 ) −θ 2
uN1 = 2k(2k−γ 2 )−θ 2
u∗N2 = γ [((22kk−−γγ 2))a22−+θθ2a1 ]
2
u∗N2 =K u∗N2 = 0
p∗N1 = 2k(a1 +γ4Kk2)−
+θ ( a2 +γ K )
θ2 p∗N1 = 2k(a14+b2γ−Kθ)2+θ a2
p∗N2 = 2k(a2 +γ4Kk2)−
+θ ( a1 +γ K )
θ2 p∗N2 = θ (a1 4+kγ2 K−)θ+2 ka2
Partially restricted 2

u∗N1 =K u∗N1 =K
u∗N2 =K u∗N2 =0
θ a2
p∗N1 = 24kak12 +
−θ 2
θ a1
p∗N2 = 24kak22 +
−θ 2
Restricted
u∗N1 =0
u∗N2 =0

Table 2
The equilibrium regions by K.

Firm 1Firm 2 Un-restricted Partially restricted Restricted

( γ [((22kk−−γγ 2))a22−+θθ2a1 ] ,
2

( (24kk−γγ((22)(k−4kγ2 −)θa22 −2
+θ a1 )
2
,
[0, γ [((22kk−−γγ 2))a22−+θθ2a1 ] ] γ (2ka1 +θ a2 ) kγ 2 )
2
Un-restricted min{ 4k2 −θ 2 −2kγ 2 −θ γ 2 , γ (2ka1 +θ a2 )
γ (2ka1 +θ a2 ) 4k2 −θ 2 −2kγ 2
]
2k (4k2 −θ 2 −2kγ 2 −θ γ 2 )−θ 2 γ 2
)
[max{ 4γk(22−kaθ 21 −2
+θ a2 )
,
[ 4k2 γ−(θ22ka 1 +θ a2 )
−2kγ 2 −θ γ 2
, kγ 2
4γ k (2ka2 +θ a1 )
Partially restricted 4kγ (2ka2 +θ a1 ) (2k−γ 2 )(4k2 −θ 2 )−4kθ γ 2 },
4k (2k−γ )−4kθ γ 2 −θ 2 (2k+γ 2 )
) 4kγ (2ka1 +θ a2 )
)
2 2

4 k 2 ( 2 k −γ 2 ) −θ 2 ( 2 k + γ 2 )
Restricted [ (44kk2γ−(θ22ka)(12+kθ−aγ2 )2 ) , +∞ )

restricted, as the advertising threshold increases. However, the sit-
uation is quite complicated when one jointly considers the two
firms.
There are six possible equilibria unde the duopoly scenario. For
convenience, we denote the six possible equilibria as the (U, U),
(U, P), (U, R), (P, P), (P, R) and (R, R) equilibrium. Here, the first
letter of each pair is for firm 1, and the second is for firm 2. The
letters U, P and R indicate that the corresponding firm’s advertising
decision is unrestricted, partially restricted and fully restricted by
the advertising threshold, respectively.
From Proposition 3, we have the following remarks on the in-
teractions between the two firms.
Remark 1. A firm’s advertising or pricing decision will be affected
by the advertising threshold when its competitor enters the par-
tially restricted regime or restricted regime.
This observation reveals an interesting result. Consider the
(U, P) regime as an example: firm 1 is not directly affected by
the advertising threshold. However, firm 2 has to over-invest in
advertising, which leads to a higher selling price. According to
Proposition 3, due to competition on price, firm 1 also sets a
higher price, which demands a higher level of advertising invest-
ment. The remark shows that when a firm is directly influenced by
the advertising threshold, its competitor will also be affected.
Furthermore, when we consider the profits under the (U, P)
regime and the (P, R) regime, we find a surprising result.
Table 2 indicates that not all the nine possible combinations can
be an equilibrium. Because firm 2 has a smaller potential market,
it is more likely to be affected by the advertising threshold effect.
When the advertising threshold K increases gradually, we can see
that firm 2 will always enter the partially restricted regime or the
restricted regime earlier than firm 1. This is why equilibrium re-
sults do not exist for the three cases located in the bottom-left
corner of Table 2.
Moreover, we can prove that when the value of K increases
gradually, there are two possible paths that the equilibrium will
take: one is (U, U) → (U, P) → (U, R) → (P, R) → (R, R), and the other
is (U, U) → (U, P) → (P, P) → (P, R) → (R, R). The former path occurs
when a2 is very small, and the latter arises when a2 is relatively
large. To illustrate how the advertising threshold level will affect
the decisions of the two firms, we plot the equilibrium decisions
of the two firms in Figs. 2 and 3, by varying K.
In Figs. 2 and 3, we vary K from 0 to 70 while holding other
parameters fixed, i.e., a1 = 100, θ = 0.6, γ = 0.8, k = 2.6 for both
figures, with the only differences being a2 = 20 in Fig. 2 and a2 =
60 in Fig. 3. Note that although specific values are used here, the
same patterns remain if the parameters vary.
(1 ) (2 )
Remark 3. (i) ∂ uN0 /∂ θ < 0; (ii) ∂ uN0 /∂ θ > 0 if a1 /a2 > A(b, θ ,
(2 )
γ ), and ∂ uN0 /∂ θ < 0 otherwise. Here, A(b, θ , γ ) = [2(2b − γ 2 )2 +
6 θ ( 2 b + θ − γ 2 )] / [ ( 2 b − γ ) 2 − 3 θ 2 ] .

Remark 2. Under the (U, P) regime, πN1 ∗ is increasing in K, and
under the (P, R) regime, πN2
∗ is increasing in K.
This result implies that a firm may even benefit from the ad-
vertising threshold, if its competitor is forced to over-invest in ad-
vertising. This suggests that the threshold having a horizontal in-
fluence is not necessarily detrimental to a firm. It depends on the
regime in which the firms operate.
Further note that although each firm’s advertising decision
could fall into three different regimes, i.e. the U, P, or R regime,
In this remark, the first result suggests that firm 1, as the larger
firm, always decreases its advertising investment as the degree of
competition θ increases. In contrast, as implied by the second re-
sult, the decision of firm 2 depends on its relative potential mar-
ket size. If the potential market size of firm 2 is relatively small,
then the advertising level of firm 2 increases with θ . However, if
the difference between the potential market sizes of the two firms
is small, then firm 2 makes similar decisions to firm 1. Because
(i )
p∗Ni = uN0 /γ , the degree of competition has a similar impact on re-
tail prices as on the advertising level.
6 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104

(a) Advertising Levels (b) Selling Prices

60 40
u1 p1
u2 p2
35
50

30
40

25

30 (P, R)

20

20 (U, R)
15 (U, P )
(U, U)
(U, U) (U, R) (P, R) (R, R)
10 (U, P )
10
(R, R)

0 5
0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70
Advertising threshold K Advertising threshold K

Fig. 2. The advertising levels and prices when a2 is small.

(a) Advertising Levels (b) Selling Prices

60 40
u1 p1
u2 p2

50 35

40 (P, R) 30
(U, P )

30 25 (U, U) (P, P )
(P, P )

(U, U)
20 20
(U, P )
(P, R)

(R, R)
10 15

(R, R)

0 10
0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70
Advertising threshold K Advertising threshold K

Fig. 3. The advertising levels and prices when a2 is large.

5. Horizontal cooperative advertising (HCA) programs
The previous section shows that even if a firm is not directly
affected by the advertising threshold, it may be influenced indi-
rectly if its competitor is affected. In this section, we investigate
whether it is possible for horizontal firms to cooperate in adver-
tising. In practice, some firms have attempted to cooperate with
others in promotion campaigns. These campaigns, which referred
to as co-marketing campaigns can take various forms, with several
involving two brand cooperation in advertising. For example, to at-
tract visitors from around China and the world, scenic spot oper-
ators in Jiangsu province such as Yunlong lake resort and Hongze
resort formed an alliance called ‘Alliance of Scenic Spots of North
Jiangsu’ and they jointly invested in TV advertising to promote
north Jiangsu tourism. Although the individual brands did not ap-
pear in the TV advertising, each partner could benefit from the in-
creased visitor flow to Jiangsu. There are also examples in which
two brands jointly advertise their products. Sometimes in one ad
you can see more than one brands. Companies, such as Didi, Uber,
and Mobike, have posted many advertisements in which another
brand name also appears besides the host brand. In this kind of
advertising, the advertising cost is divided among partners, which
thus reduces the advertising expenditure of one firm.
In this section we investigate two types of HCA programs, to ex-
plore their value when the advertising threshold effect is present.
First, we consider a scenario in which two brands share space and
expenditures in one advertisement, and both brand names appear
in the advertisement. Second, we consider a scenario in which two
brands form an alliance and share a common brand name. Both
firms invest in the advertising for the common brand and benefit
from the advertising in that the common brand is closely related
to their products/services. In both scenarios, in addition to adver-
tising cooperation, both firms still have the freedom to decide their
own selling prices. These settings fit the current industry practices.
There are also cases in which the firms build more closer alliances,
and the selling price is also determined jointly. However, this is
not the focus of our paper.
5.1. Scenario I: two brands in one advertisement
In this scenario, two brands invest in adverting with both
brand names shown in the advertisement. The advertising space
 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104
is shared, and the advertising expenditure is divided between two
parties according to the allocation of the advertising space. The al-
location of the advertising space is uneven, and thus the expen-
diture allocation is not even either. Similar practices are observed
in co-branding and ingredient advertising. For example, the “Intel-
inside” label is actually another brand name that appears in the
advertisements of PC manufacturers, for which Intel pays part of
the advertising expenditure. However, to secure Intel’s support the
advertising space for the label is strictly specified. Another issue
must be addressed here. When two brands appear in one adver-
tisement, there could be synergy effect (or conflict effect) when we
consider the interaction of the two brands. A synergy effect might
occur because the advertising content is richer and the delivery of
information may be more effective, as the recall of the advertise-
ment can be triggered by either brand. A conflict effect might also
occur since the advertising content is more complex and may lead
to confusion. We should take the synergy (or conflict) effect into
consideration when two brands are shown in one advertisement.
The sequence of events is as follows. Firm 1 determines its ad-
vertising participation rate (APR), φ1 = φ , for the joint advertising.
Firm 2 then decides the advertising level of the joint advertising
after learning its APR, φ2 (= 1 − φ ). Given the advertising level and
APR, both firms determine their selling prices (p1 , p2 ) simultane-
ously.
Similar to the Eq. (8), the sales for firm i(i = 1, 2 ) is
Si = ai + φi δ (u ) − kpi + θ p3−i ,
where = γ · (1 + g). When the synergy effect is positive, we
would expect g > 0 or > γ . Note here that firm i will only obtain
a portion of the increased customer flow which is equal to the APR
that the firm undertakes. Then, the profit for firm i(i = 1, 2 ) is
φi
πi = p i S i − u2 .
2
Solving the problem by backward induction, we first derive the
equilibrium retail prices ( p∗1 , p∗2 ) for both firms given (φ , u), then
obtain the optimal advertising level u∗ for firm 2, and finally we
solve the optimal APR for firm 1. The following proposition shows
the equilibrium retail prices given φ and u.
Proposition 4. Given u and φ , the equilibrium retail prices are given
by
2kai + θ a3−i + (2kφi + θ φ3−i ) δ (u )
pi ( φ , u ) = , (15)
4k2 − θ 2
and the profits are given by
k{2kai + θ a3−i + (2kφi + θ φ3−i ) δ (u )}2 φi
πi = − u2 ,
( 4k2 − θ 2 )2 2
In the following, we analyze how firm 2 decides the total ad-
vertising level given firm1’s APR.
Proposition 5. The optimal advertising level determined by firm 2 is
given by:
(i) when φ ≥ φ˜ , u∗I = +∞, where φ˜ is the positive root of equa-
tion 2k 2 (2k − 2kφ + θ φ )2 − (4k2 − θ 2 )2 (1 − φ ) = 0, i.e.,

2k ( 2k + θ )2 ( 2k + θ ) (4k2 − θ 2 )2 − 8k2 (2k − θ ) 2
φ˜ = − +
2k − θ 4k 2 4 2 k ( 2 k − θ )
(ii) When 0 < φ < φ˜ ,
 some cases, firms invest in category advertising when they spe-
uC0 if K ≤ uC0
u∗I = K if uC0 < K < 2uC0
0 if K ≥ 2uC0 ,
where
2k [2k(1 − φ ) + θ φ ](2ka2 + θ a1 )
uC0 = . (19)
(4k2 − θ 2 )2 (1 − φ ) − 2k 2 [2k(1 − φ ) + θ φ ]2
7
Proposition 5 (i) shows that if firm 1 demands a very high APR,
firm 2 will select an extremely high advertising level, which en-
tails a substantial loss for firm 1. This would thus never happen.
Proposition 5(ii) presents the optimal total advertising level in dif-
ferent cases. To clearly show the value of horizontal cooperative
advertising programs under the advertising threshold effect, in the
following, we focus solely on the cases in which at least one firm
is affected by the advertising threshold effect.
Lemma 1. (i) When 0 < < 1 , ∂ uC0 /∂ φ > 0;
(ii) When 1 < < 2 , ∂ uC0 /∂ φ < 0 in (0, φ 0 ) and ∂ uC0 /∂ φ > 0 in
2 k+θ θ (2k−θ ) −θ 2
4k2√
(φ0 , φ˜ ); where 1 = , 2 = , and φ0 = 2k
2k−θ
−
2k 2k 2k 2k
2 k+θ θ
2k(2k−θ )
.
This lemma shows that there’s a mapping relation between APR
and advertising level. When the mapping is one to one, we denote
the inverse function of uC0 (φ ) by η1 (u ). When the mapping is not
one to one, note that each u corresponds to only two φ ’s, among
which only one could bring higher profit for firm 1. In such a case,
denote the best φ as η1 (u).
Moreover, regarding the decision of firm 1, we have the follow-
ing lemmas.
Lemma 2. When firm 1 anticipates the advertising level to be K,
he will always set φ just low or high enough, such that either φ =
(13) min{φ : K/2 ≤ uC0 (φ ) ≤ K } or K = uC0 (φ )
This lemma establishes the best decision of firm 1 if firm 2
should decide to meet the advertising threshold. The next lemma
establishes that firm 1 can always find an optimal APR in (0, φ˜ ) if
the advertising threshold effect is absent.
(14) Lemma 3. In scenario I, with the advertising threshold effect absent,
there exists an optimal φ ∗ in the interval (0, φ˜ ) that maximizes the
profit of firm 1.
Denote uC0∗ as the solution to dπ1 (u, φ (u ))/du = 0, which is
optimal to firm 1 as the advertising threshold effect is absent.
Let φ = min{φ : K/2 ≤ uC0 (φ ) ≤ K }, φˆ = max{φ : uC0 (φ ) = K }. Given
these lemmas, we have the following proposition which gives the
optimal APR.
Proposition 6. Under scenario I the optimal decision of APR by firm
1, denoted by φI∗ , is as follows:
(i) if K < uC0∗ , then φI∗ = η1 (uC0∗ ) and this leads to u∗I = uC0∗ ;
4k(2ka1 +θ a2 )[2kφ +θ (1−φ )]
(ii) if K > for φ ∈ {φ , φ}
(4k2 −θ 2 )2 φ −2k[2kφ +θ (1−φ )]2 2
ˆ , then φ ∗ =
I
(16)
0, and this leads to u∗I = 0;
(iii) otherwise, either φI∗ = φ or φI∗ = φˆ , and this leads to u∗I = K.
Proposition 6 shows that if K is sufficiently high, the HCA
programs cannot be practiced. When the advertising threshold is
medium, firm 1 will always choose the lowest or the highest APR
that will induce firm 2 to decide an advertising level exceeding the
threshold.
; 5.2. Scenario II: sharing a common brand name
(17) In this scenario, we consider the case in which two brands
form an alliance and advertise through a common brand name. In
cialize in that category. This kind of advertising can be interpreted
(18) as advertising under a common brand name. For example, in early
2019, the notion of flexible display is clearly associated with Sam-
sung and Huawei, since they are first movers and easily identifi-
able in this category. As previously mentioned, firms located in a
given region also sometimes advertise through a common regional
8 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104
brand name. Regardless of whether the products/services are sub-
stitutes or compliments, the firms all benefit from increased cus-
tomer flows to their region.
As the firms share a common brand, the advertising effect
comes from the total customer flow of the common brand. Thus,
the advertising effect is not allocated according to the advertis-
ing space allocated to each firm. We assume here that the allo-
cation of the advertising effect is exogenously given, independent
of the allocation of advertising expenditure. The sales function of
firm i(i = 1, 2 ) is given by
Si = ai + ϕi δ (u ) − kpi + θ p3−i ,
where ϕ i (ϕ1 + ϕ2 = 1) is the proportion of the advertising effect
of the common brand borne by firm i, representing how much
of the customer flow generated by the common brand advertis-
ing goes to firm i. In advertising, a common brand may be either
more or less effective than an individual brand. We still use the
 .
synergy/conflict effect factor to characterize the difference between
common brand and individual brand advertising. Then, the profit
for firm i(i = 1, 2 ) is
φi
πi = p i S i − 2
u .
2 the total advertising expenditure. Note that φ ∗ should be positive.
Note here that the allocation of advertising expenditure differs
from that in the scenario with two brand in one advertising sce-
nario. It is possible that a firm may pay a larger or smaller fraction
than the portion of effect he obtains.
The sequence of events is as follows. Firm 1 decides the APR
first. Given the APR, firm 2 determines the advertising level of the
common brand. After the adverting level is determined, both firms
simultaneously decide their selling prices.
Similar to the previous subsection, we solve the problem by
backward induction. First we solve for the equilibrium selling
prices given the advertising levels.
Proposition 7. Given u and φ , the equilibrium retail prices are given
by
2kai + θ a3−i + (2kϕi + θ ϕ3−i ) δ (u )
pi ( φ , u ) = , (22)
4k2 − θ 2
and the profits are given by
k{2kai + θ a3−i + (2kϕi + θ ϕ3−i ) δ (u )}2 φi
πi = − u2 .
( 4k2 − θ 2 )2 2 and then we verify the general case in numerical analysis. In the
Next we establish the best response function of firm 2 given the
decision of firm 1.
Proposition 8. Given φ , the optimal advertising level determined by
firm 2 is given by:
2k(2kϕ2 +θ ϕ1 )2 2
(i) if φ ≥ φ̄ = 1 − 4k2 −θ 2
, u∗II = +∞;
(ii) otherwise,
 threshold is very low and the synergy effect is weak, the brand sharing
u0S if K ≤ u0S
u∗II = K if u0S < K < 2u0S
0 if K ≥ 2u0S ,
where
2k (2ka2 + θ a1 )(2kϕ2 + θ ϕ1 )
u0S = . (25)
(1 − φ )(4k2 − θ 2 )2 − 2k 2 (2kϕ2 + θ ϕ1 )2
Proposition 8 presents the optimal advertising level given the
APR φ . We find that if the advertising threshold level K is too high,
then firm 2 will not invest any in advertising. In addition, when K
is relatively high, the best strategy for firm 1 is not to invest in
advertising. The above two cases lead to the breakdown of brand
sharing program. When K is not high, the optimal advertising level
for firm 2 is u0S . Note that the relationship between the u0S and φ
is one-to-one mapping and u0S increasing in φ . Thus, we can define
the inverse function of u0S as η2 ( · ).
Given the best response of firm 2, we can convert the optimiza-
tion problem of firm 1 into the following problem,
k[2ka1 + θ a2 + u(2kϕ1 + θ ϕ2 )]2 η2 ( · )
max π1 (u ) = − u2 . (26)
u ( 4k2 − θ 2 )2 2
The optimal APR decision by firm 1 is given in the following propo-
sition.
Proposition 9. In scenario II, the firms will not cooperate in adver-
tising if $K>K_1$. Otherwise, the optimal decision of APR by firm 1 is
given by,
(20) (i) if u0S ∗ < K < K1 , then φII∗ = η2 ( K2 ) and u∗II = K;
(ii) if K < u0S ∗ , then φII∗ = η2 (u0S ∗ ) and u∗II = u0S ∗ ;
4k (2ka +θ a )(2kϕ +θ ϕ )
where K1 = η (K/2 )(4k2 −1θ 2 )2 −2
2 1 2
k 2 (2kϕ1 +θ ϕ2 )2
2
k 2(2ka1 + θ a2 )(2kϕ1 + θ ϕ2 ) + (2ka2 + θ a1 )(2kϕ2 + θ ϕ1 )
uS0∗ =
( 4 k 2 − θ 2 ) 2 − 2 k 2 ( 2 kϕ 1 + θ ϕ 2 ) 2 + ( 2 kϕ 2 + θ ϕ 1 ) 2
(27)
Proposition 9 demonstrates that it is possible to establish a co-
operative advertising program with each firm bearing a portion of
(21)
If it is not positive, then cooperative advertising cannot happen un-
der such a case.
However, it is not clear whether such a cooperative advertising
program is beneficial? Thus, we should explore whether HCA pro-
grams are beneficial and who will benefit from them.
5.3. Value of HCA programs
In this subsection, we explore the value of HCA programs. By
comparing them with the duopoly case, we will be able to show
whether HCA programs are beneficial. We also investigate the ef-
fect of factors that would influence the value of HCA programs.
This will shed light on how and when the HCA programs will of-
fer the greatest value. We also explore the disadvantages of HCA
programs in this subsection.
As the solutions under HCA programs are quite complicated,
comparing the profits with the duopoly case directly leads to ex-
treme complex results. The analytic form doesn’t even exist in sce-
(23) nario I. Thus, we only consider the symmetric case for scenario II,
rest of this subsection, we assume that a1 = a2 = a. It is straight
forward to assume that ϕ1 = ϕ2 = ϕ = 1/2.
We first address the question of whether HCA programs are
beneficial. The following proposition shows that a HCA program is
beneficial under some condition.
Proposition 10. When the two firms are symmetric, if the advertising
program is not beneficial.
(24)
This proposition shows that when both firms are not affected
by the advertising threshold, then it is better not to cooperate in
advertising.
Proposition 11. If the advertising threshold is not very low, the brand
sharing program can be beneficial if the following condition satisfies.
k(8aγ + 4γ 2 K − 4a − 2 K ) < (2k − θ )2 K (28)
As we would expect, when K is too high, HCA programs are not
beneficial because too much advertising is required while it is also
not necessary. Furthermore, when K is too low, HCA programs are
not beneficial, either. This is due to the cost effectiveness of adver-
tising. The individual brand advertising is more cost effective than
cooperative brand advertising, if without synergy effect. To realize
 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104 9

1600 1600

πN
1
πN
1

1400 πN
2 1400 πN
2
I II
π1 π1

πI πII
2 2
1200 1200
Profits

Profits
1000 1000

800 800

600 600

400 400
0 10 20 30 40 50 60 0 10 20 30 40 50 60
Advertising threshold K Advertising threshold K

Fig. 4. The profits of two firms under HCA programs and duopoly case.

Fig. 5. Advertising synergy effect on HCA programs.

an the advertising effect of γ u for each firm, the advertising level Proposition 13. The two-brand-in-one-advertising program is more
should be u under individual advertising and 2u under cooperative valuable than the common brand sharing advertising program when
advertising. This requires a total expenditure of 12 u2 + 12 u2 = u2
under individual brand advertising but 12 (2u )2 = 2 · u2 under co- 2k (2ka2 + θ a1 )
uS0∗ <  .
operative advertising if the advertising effect and cost are shared [4k2 − θ 2 − 2 2kθ (2k − θ )](2k + θ )
evenly.
We next show even if cooperative advertising is not cost effec-
The proposition shows that the two-brand-in-one-advertising
tive as individual advertising, firms will be able to benefit from
program can be more valuable, as it ensures a larger feasible re-
HCA programs. The next question we would like to tackle is Who
gion of cooperative advertising and higher profits. The reason is
will benefit more from HCA programs?
that in Scenario I, the advertising cost are allocated according to
a fair mechanism that entails greater incentives for both firms to
Proposition 12. The initiator of an HCA program benefits more from
participate.
it.

Although the two HCA programs we consider above differ in Proposition 14. Under scenario II, when two firms are symmetric, we
their advertising effects and cost allocation mechanisms, we would have
∂ u∗ ∂π ∂π
want to know which is better? Thus, the question is when and (i) ∂θII ≤ 0, ∂θ1 < 0, and ∂θ2 < 0;
∂ u∗ ∂π
which HCA program we have explored is more valuable? (ii) ∂ II ≥ 0, ∂ i ≥ 0.
10 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104

Fig. 6. Impact of decision sequence on firms’ profits.

Fig. 7. Impact of θ on HCA programs.

These two propositions shed some light on when firms should
seek horizontal advertising partners and what kinds of partners
they should consider. To develop some intuitions, we would illus-
trate the results in numerical analysis.
6. Numerical analysis
Based on the previous results in this paper, in this section we
study how the value of HCA varies with different settings and fac-
tors. Our analysis uses the following parameter values: a1 = 100,
a2 = 60, b = 2, γ = 0.8, and θ = 0.6.
To investigate the value of HCA programs, we compare the two
u = K, the profit of frim 1 decreases with increases of K and the
firm2’s profit increases with increases of K. In summary, without
advertising synergy effects, two firms can barely benefit from HCA
programs.
In the following, we explore how advertising synergy affects the
value of HCA programs.
In Fig. 5, we only consider the advertising synergy effect under
the case where advertising level exceeds the advertising thresh-
old, and under other cases, the results are similar to this case.
The sub-figure on the left of Fig. 5 shows the advertising levels
of two HCA programs increase with the increase of g, which sug-
gests that advertising synergy effects helps firms to overcome ad-
HCA programs with the duopoly case under the condition of g =
0. By varying the value of K while keeping other variables fixed,
we get the Fig. 4. From Fig. 4, we find that (i) under scenario I,
the profit of both firms does not exceed that of duopoly case; (ii)
vertising threshold effects easily. Let πi (i = 1, 2 and j = I, II) de-
j
note the benefits of firm i from HCA program j, and we find that
the greater the synergy effect of advertising, the more profits the
firms earns from HCA programs. In addition, we find uI > uII and
under scenario II, the profit of firm 1 is less than that of duopoly π1I + π2I > π1II + π2II from Fig. 5, which indicates that the
case, but when K is not too high or too low, the profit of firm 2 two brands in one advertising program is more valuable than the
more than that of duopoly case. In addition, we find that when common brand sharing advertising program.
 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104 11

Trying to describe how decision sequence affects two firms’ Acknowledgment

profits under two HCA programs, we change the firm2’s market
size a2 while keeping other variables fixed. We consider two cases: The authors thank two anonymous reviewers and the Asso-
(i) firm 1 moves first and decides the APR, and then firm 2 deter- ciate Editor for their helpful comments and suggestions in improv-
mines the advertising level; (ii) firm 2 moves first and decides the ing this paper. This work was supported by the National Natu-
APR, and then firm 1 determines the advertising level. Using su- ral Science Foundation of China (Grant nos. 71671170, 71501059,
perscript ‘F’ to represent the case where firm 2 moves first. Then 71571174, 71171182) and the Funds for International Cooperation
the results are presented in Fig. 6. and Exchange of the National Natural Science Foundation of China
Fig. 6 presents the profit of each firm under two different se- (Grant no. 71110107024).
quences of decisions, and we find that who moves first will get
more profits. Moreover, the profits of two firms are increasing with Appendix A. Proofs
the increase of a2 , which suggests that firms tend to look for hori-
zontal cooperative partners that have little difference in the size of Proof of Proposition 1
their markets.
Varying the value of θ from −0.3 to 0.3 while keeping other Because π (u, p) is a piece-wise function, we utilize the divide-
parameters fixed, we try to study the effect of competition or com- and-conquer approach to solve the optimization problems. For any
plementary, and the results are shown in Fig. 7. given u, the first and second derivatives of π (p, u) in Eq. (3) with
When two firms are competing (θ > 0), with the increase of respect to p are
competition intensity, the advertising level of two HCA programs ∂π ( p, u )
= a − 2bp + γ δ (u ) (A.1)
decreases, the profit of firm 1 decreases, and the profit of firm 2 ∂p
increases. This suggests that the leader of the HCA programs are
and
more likely to cooperate with firms that are less competitive. Sim-
ilarly, when two firms are complementary (θ < 0), the leader of ∂ 2 π ( p, u )
= −2b < 0. (A.2)
the HCA programs are tend to cooperate with firms that are more ∂ p2
complementary. Thus, π (p, u) is a concave function with respect to p. The first-
order condition gives the optimal price for any u, i.e., p∗ (u ) =
a+γ δ ( u )
2b
. Substitute p∗ (u) into Eq. (3), so the optimization problem
7. Conclusion is converted to
[ a + γ δ ( u )] 2 u2
The advertising threshold effect implies that advertising has lit- max π (u ) = − . (A.3)
u 4b 2
tle influence on sales if it is below a certain level. Although the
Since δ (u) is a piece-wise function, we discuss the optimal so-
advertising threshold effect has been proven, few models have in-
lutions under the two cases u < K and u ≥ K.
vestigated its impacts on advertising decisions, especially in a hor-
(i) When u < K, we have δ (u ) = 0 and Eq. (A.3) becomes π (u ) =
izontal context. a2 2
To fill this research gap, we propose an advertising and pricing 4b
− u2 . It is easy to get the optimal solution u∗ = 0 since π (u) is
model that includes horizontal related firms in which the advertis- decreasing in u (u > 0). The corresponding profit is given by π ∗ =
a2
ing threshold effect is incorporated by through a two-regime sales 4b
.
function. We first explore the impacts of the advertising thresh- (ii) When u ≥ K, we have δ (u ) = u and Eq. (A.3) becomes
( a+γ u )2 u2
old in a monopoly scenario and a duopoly scenario. We find that π (u ) = 4b
− The first derivative of π (u) with respect to u
2 .
γ ( a+γ u )
(i) a firm may over- or under-invest in advertising, depending on is dπdu(u ) = 2b
− u .
the level of the advertising threshold; (ii) if one firm is influenced It can be observed that π (u) is increasing in the interval
γa γa
by the advertising threshold, that influence will be passed on to (0, 2b− γ2
] and decreasing in the interval ( 2b−γ 2 , +∞ ), and also
its competitor, which surprisingly, might benefit a firm if its com- 2γ a aγ
petitor is forced to over-invest in advertising. We then investigate π ( 2b−γ2
) = π (0 ). Thus, when 0 < K ≤ 2b−γ 2
, the optimal adver-
aγ aγ 2γ a
two HCA programs—a joint advertising program and a brand shar- tising level is u∗ = 2b−γ 2
; when 2b−γ 2
<K< 2b−γ 2
, u∗ = K; and
ing advertising program. Specifically, in the joint advertising pro- 2γ a
when K ≥ 2b−γ 2
, the optimal advertising effort is u∗ = 0.
gram, the two firms invest in an advertising campaign with two
brands, while in the brand sharing advertising program, the two In summary, the optimal advertising level is given as follows:
⎧ aγ aγ
firms share a common brand and jointly determine their adver- ⎨ 2b−γ 2 , if K ≤ 2b−γ 2
;
tising. The results shed light on the value of HCA programs. We aγ 2aγ
u∗M = K, if 2b−γ 2
< K < 2b− γ2 ; (A.4)
also provide some insights into when and how to initiate HCA pro- ⎩ 2aγ
0, if K ≥ 2b− γ .
grams. 2

aγ
Future directions for the research addressed in this paper in- Denoting u0M = 2b−γ 2
and substituting u∗ in Eq. (A.4) into p∗ (u)
clude the following. First, we assume that the firms do not face
and π (u), we get the optimal solutions shown in Proposition 1.
budget constraints, which is a simplification of reality. Taking bud-
get constraints into consideration would lead to a more realis- Proof of Proposition 2
tic but complicated model. Second, in practice, it is more likely
that two firms with complementary products will cooperate in ad- Given the decisions of firm 3 − i, i.e., advertising level u3−i and
vertising. Although the present model can accommodate the case retail price p3−i , we utilize the divide-and-conquer approach to
in which the two products are complementary by setting θ < 0 determine the optimal decisions of firm i. The first and second
in Eq. (7), we did not discuss this case analytically, which en- derivatives of π i (u1 , u2 , p1 , p2 ) in Eq. (9) with respect to pi are
tails greater mathematical complexity but would be an interesting ⎧
problem to address. Third, there are several types of advertising ⎪ ∂π (u , u , p , p )
⎨ i 1 2 1 2 = ai + γ δ (ui ) − 2kpi + θ p3−i
with different objectives. When firms need to allocate advertising ∂ pi
∂ 2 πi ( u 1 , u 2 , p 1 , p 2 ) . (A.5)
expenditure among these types, the advertising threshold may im- ⎪
⎩ = −2k.
pose a different impact, and this question demands further study. ∂ pi 2
12 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104

Thus, π i (u1 , u2 , p1 , p2 ) is a concave function. From the first- Proof of Proposition 5

order condition we can get the optimal retail price for any ui , i.e.,
a + γ δ ( u )+ θ p Given φ , firm 2 tries to find the best u to optimize his own
pi (ui , u3−i , p3−i ) = i i
2k
3−i
. Substituting pi (ui , u3−i , p3−i ) into
Eq. (9), the problem becomes profit. When u < K, π 2 is decreasing in u, thus u = 0 is optimal in
this interval. When u ≥ K, the first and second derivatives of π 2
[ai + γ δ (ui ) + θ p3−i ]2 u2
max πi (ui , u3−i , p3−i ) = − i . (A.6) with respect to u are
ui 4k 2
⎧
Since δ (ui ) is a piece-wise function, we discuss the optimal so- ⎨ ∂π2 = 2k [2k(1 − φ ) + θφ ]{2ka22 + θ a2 1 2+ [2k(1 − φ ) + θφ ] u} − (1 − φ )u
⎪
∂u ( 4k − θ )
lutions under the two cases ui < Ki and ui ≥ Ki . Referring to the ⎪ ∂2π 2k 2 [2k(1 − φ ) + θφ ]2
γ (ai +θ p3−i ) ⎩ 22 = − (1 − φ )
proof of Proposition 1, let uNi = and we can derive the ∂u ( 4k − θ )
2 2 2
2k−γ 2
equilibrium advertising level ui (u3−i , p3−i ) of firm i as follows. (A.9)

uNi if K ≤ uNi It can be seen that if φ˜ < φ < 1, π 2 (u) is convex and
ui (u3−i , p3−i ) = K if uNi < K < 2uNi (A.7) lim π2 → +∞. Consequently, the optimal advertising level is
u→+∞
0 if K ≥ 2uNi
u∗I = +∞. When this happens, π1 = −∞.
Substituting ui (u3−i , p3−i ) in Eq. (A.7) into expression We have ∂ 2 π 2 /∂ u2 < 0 when φ < φ˜ . The first order condition in
a + γ δ ( u )+ θ p
pi (ui , u3−i , p3−i ) = i i
2k
3−i
, the equilibrium retail price Eq. (A.9) gives us
of firm i is as shown in Proposition 2.
2k [2k(1 − φ ) + θ φ ](2ka2 + θ a1 )
uC0 = .
Proof of Proposition 3 (4k2 − θ 2 )2 (1 − φ ) − 2k 2 [2k(1 − φ ) + θ φ ]2
The structure of the solution is similar to Proposition 1.
According to the proof of Proposition 2, we know that
ui (u3−i , p3−i ) is a function of p3−i and pi (ui , p3−i ) is a function of
ui and p3−i , so pi (ui , p3−i ) is also a function of p3−i . Thus, there is Proof of Lemma 1
a mapping relationship between p1 and p2 . For any K and consid-
ering the constraints of ui ( p3−i ) in Eq. (A.7), we first divide p3−i From Proposition 5, we can obtain
(2k−γ 2 )K−2γ ai (2k−γ 2 )K−2γ ai
into three conditions: p3−i ≤ 2γ θ
, 2γ θ
< p3−i <
(2k−γ 2 )K−γ ai (2k−γ 2 )K−γ ai
∂ uC0 2k (2ka2 + θ a1 )(2k − θ ) f (φ )
, and p3−i ≥ . Then, the optimal advertis- = ,
γθ γθ ∂φ [(1 − φ )(4k2 − θ 2 )2 − 2k 2 (2k(1 − φ ) + θ φ )2 ]2
ing level ui and retail price pi for firm i are given by
(Ai ): u∗i =
γ (ai +θ p3−i ) a +θ p
, pi = i2k−γ32−i , when p3−i ≥
(2k−γ 2 )K−γ ai
; where f (φ ) = (2k + θ )2 (2k − θ )θ − 2k 2 [2k(1 − φ ) + θ√
φ ]2 . Note
2k−γ 2 γθ 4 k2 − ( 2 k+θ ) 2kθ (2k−θ )
∗ ai +γ K+θ p3−i (2k−γ 2 )K−2γ ai that f (φ ) is concave with two zeros, φ1 = 2k(2k−θ )
(Bi ): ui = K, pi = 2k
, when 2γ θ
< p3−i < √
4k2 +(2k+θ ) 2kθ (2k−θ )
(2k−γ 2 )K−γ ai and φ2 = 2k(2k−θ )
> 1. This implies that f (φ ) < 0
γθ ;
when φ < φ1 , and f (φ ) > 0 when φ > φ1 .
∗ a +θ p (2k−γ 2 )K−2γ ai
(Ci ): ui = 0, pi = i 2k 3−i , when p3−i ≤ ; 2 k+θ θ (2k−θ )
2γ θ Furthermore when < 1 = 2k 2k
, then φ1 < 0, other-
According to the constraints of p1 and p2 , we can find 9 equi-
libria, one for each of the cases (A1 , A2 ), (A1 , B2 ), (A1 , C2 ), (B1 , A2 ), wise φ1 > 0. Note also that in order to ensure that uC0 > 0 we need
−θ 2
4k2√
(B1 , B2 ), (B1 , C2 ), (C1 , A2 ), and (C1 , B2 ), (C1 , C2 ). Consider the solu- < 2 = 2k 2k
.
tion under the case (A1 , C2 ) as an example. Thus when < 1 , f (φ ) > 0 for φ ∈ (0, φ˜ ), consequently
γ ( a +θ p )
Firstly, we have u1 = 2k1−γ 2 2 and u2 = 0. Then we solve ∂ uC0 /∂ φ > 0 since it has the same sign with f (φ ). When 1 < <
a1 +θ p2 a2 +θ p1 2 , f (φ ) < 0 for φ ∈ (0, φ1 ) and f (φ ) > 0 for φ ∈ (φ1 , φ˜ ), conse-
the two equations p1 = 2k−γ 2
and p2 = 2k
, and get p1 =
2ka1 +θ a2 (2k−γ 2 )a2 +θ a1
quently we have ∂ uC0 /∂ φ < 0 for φ ∈ (0, φ1 ) and ∂ uC0 /∂ φ > 0 for
and p2 = . Secondly, we can get the
2k(2k−γ 2 )−θ 2 2k(2k−γ 2 )−θ 2 φ ∈ (φ0 , φ˜ ).
γ (2ka1 +θ a2 )
u1 = 2k(2k−γ 2 )−θ 2 and u2 = 0. Finally, we substitute the p1 and
p2 into the constraint under the case (A1 , C2 ) and obtain
4kγ [(2k−γ 2 )a2 +θ a1 ] γ (2ka1 +θ a2 ) Proof of Lemma 2
[2k(2k−γ 2 )−θ 2 ](2k−γ 2 )
≤K≤ 2k(2k−γ 2 )−θ 2
. Due to a1 > a2 , the equi-
librium solutions for cases (B1 , A2 ), (C1 , A2 ) and (C1 , B2 ) do not When firm 1 anticipates the advertising level to be K, the profit
exist. We can determine the other equilibrium solutions shown in function of firm 1 is
Proposition 1 by methods similar to that used to get the equilib-
rium for (A1 , C2 ). k{2ka1 + θ a2 + (2kφ + θ (1 − φ )) K }2 φ
π1 = − K2, (A.10)
( 4k2 − θ 2 )2 2
Proof of Proposition 4
The first and second derivatives of π 1 with respect to φ are
For any given φ and u, both firms determine their retail prices ⎧
⎪ ∂π 2kK (2k − θ )[2ka1 + θ a2 + (2kφ + θ (1 − φ ) K )]
simultaneously and the equilibrium of selling prices is a Nash Equi- ⎨ 1 = − K 2 /2
∂φ ( 4k2 − θ 2 )2
librium. It can be obtained by solving the system of first order con- ∂ 2π 2kK 2 2
⎪
⎩ 21 =
ditions as follows:
∂φ ( 2k + θ )2
∂πi
= ai + φi δ (u ) − 2kpi + θ p3−i = 0, (A.8) (A.11)
∂ pi
∂ 2 π1
since ∂ 2 πi /∂ p2i = −2k < 0 ensures the concavity. Solving the sys- Since ∂φ 2
> 0, π 1 is a convex function. Thus, the optimal φ is
tem of equations leads to the equilibrium prices and then we get either the left or the right boundary of the interval of φ which
the profit functions as shown in Proposition 4. induces the advertising level in (K/2, K).
 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104 13

Proof of Lemma 3 Proof of Proposition 9

When the advertising threshold effect is absent, we substitute (i) When firm 1 anticipates u∗II = 0, he will not invest in adver-
∂π1 (φ ) tising. Consequently, the profit of firm 1 is π 1 (0);
u = uC0 into π 1 , and we get ∂φ |φ =0+ > 0 and π 1 (0) > 0. As φ →
(ii) When firm 1 anticipates u∗II = K, π1 (φ )|u=K is a decreas-
φ˜ , π1 → −∞. Since π 1 is continuous, there exists at lease one opti-
ing function with respect to φ . From Proposition 8, the constraint
mal φ ∗ that maximizes the profits of firm 1 which can be obtained
of K is u0S < K < 2u0S . Because of ∂ u0S /∂ φ > 0, the optimal APR of
through FOC.
firm 1 is φ ∗ = η2 (K/2 ) under this case, and the profit of firm 1 is
π 1 (η2 (K/2)).
Proof of Proposition 6
(iii) When firm 1 anticipates u∗II = u0S ∗ , the unconstrained
∂π1
optimal advertising level, we can get from ∂ u = 0, u0S ∗ =
Though the analytic form of the profit function of firm 1 

is too complicated to optimize, the solution procedure is quite k 2(2ka1 +θ a2 )(2kϕ1 +θ ϕ2 )+(2ka2 +θ a1 )(2kϕ2 +θ ϕ1 )
. Then we get φ ∗ =
straight forward and give us the structural properties shown in
Proposition 6. We only need to discuss the following three cases:
u = uC0∗ , u = K, and u = 0.
(i) u = uC0∗
If the advertising threshold is very low, i.e., uC0∗ > K, then the
optimal decision of firm 1 may be in feasible region. Since it is the
unconstrained optimal decision for firm 1, he will always prefer
this rather than u = K.
(ii) u = K
If the advertising threshold is medium such that K > uC0∗ . It is
not possible for firm 1 to choose the first best decision uC0∗ . Under
this case, firm 1 have to choose an APR such that u = K. According
(4k2 −θ 2 )2 −2k 2 (2kϕ1 +θ ϕ2 )2 +(2kϕ2 +θ ϕ1 )2
η2 (u0S ∗ ) and the profit of firm 1 is π1 (η2 (u0S ∗ )).
Comparing profits under these cases leads to the result.
Proof of Proposition 10
To prove this we need to compare the brand sharing case
with the duopoly case under the unrestricted regime. Note that
when the firms are not restricted by the advertising thresh-
old, for the brand sharing case, uS = 2(2k−3θk) 2 a−2k 2 and πS =
ka2 [16(2k−θ )2 −k 2 ] aγ
8(2k−θ )2 [(2k−θ )2 −k 2 ]
. For the duopoly case, uN = 2k−θ −γ 2 and

πN = (a2k−(2θk−−γγ 2 ))2 . When = γ > 0, we have πS < [(2k−2θka

2 2 2
to Lemma 2, when this happens, the best APR for firm 1 is either .
)2 −k 2 ]
the lower or the upper bound of φ which induces firm 2 to choose πS 2k(2k−θ −γ 2 )2
u = K. Thus π < [(2k−θ )2 −k 2 ](2k−γ 2 ) < 1, since 2k(2k − θ − γ ) − [(2k −
2 2
N
(iii) u = 0 θ )2 − k 2 ](2k − γ 2 ) = −γ 2 (2k2 − θ 2 − kγ 2 ) < 0. Since πS is in-
Since marginal return of advertising is decreasing, it follows creasing in and πN is increasing in γ , we have for any given
that if K is sufficiently large, advertising at level K is not profitable. γ > 0, when ≤ γ , πS < πN always holds.
In such a case it is better not to participate in the HCA program.
Thus firm 1 should set u = 0 when π 1 (u = 0)>π 1 (u = K). Proof of Proposition 11

Proof of Proposition 7 Under partially restricted regime, we have u∗ = K for both the
duopoly case and the brand sharing case. The difference of the
The proof is similar to Proposition 4 and thus is omitted. profit under the two cases is:

kK K2
Proof of Proposition 8 π = π S − π N = (4a + 2 K − 8aγ − 4γ 2 K ) +
2 ( 2k − θ )2 2
Given the advertising participation rate φ , we solve the opti- (A.15)
mal advertising level u in the following. Since δ (u) is a piece-wise After rearranging the terms, we can obtain the result.
function and it is easy to find that the firm 2 will not invest in
advertising when u < K. When u ≥ K, according to the profit of firm Proof of Proposition 12
2 in Proposition 7, the first and second derivatives of π 2 with re-
spect to u are Since the two firms are symmetric, we need only to consider
⎧ two cases: (U,U) and (P,P). According to Proposition 8, we divide
⎨ ∂π2 = 2k (2kϕ2 + θ ϕ1 )[2ka22 + θ a2 1 2+ (2kϕ2 + θ ϕ1 ) u] − (1 − φ )u
⎪ our discussion into two cases: u = u0S and u = K.
∂u ( 4k − θ ) (i) u = u0S
⎪ ∂ 2π 2k 2 (2kϕ2 + θϕ1 )2
⎩ 22 = − ( 1 − φ ). Substituting u = u0S into the profit function of firm 1, and we
∂u ( 4k2 − θ 2 )2
get the first and second derivatives of π 1 are
(A.12) ⎧
⎨ ∂π1 = 24kφ (k − θ ) − k 2 + 6φθ − 2(223k − θ )
⎪ 2 2 2
∂2π
From the above equation, we have ∂ u22 < 0 when 0 < φ < ∂φ ( 2 ( 2k − θ ) ( φ − 1 ) + k ) (A.16)
⎩ ∂ π21 = − 24k a (2k − θ2 ) [2(2k − θ ) 2 −4 k ] .
⎪ 2 2 2 2 2 2 2
∂2π 2k 2 (2kϕ2 +θ ϕ1 )2
φ̄ and ∂ u22 > 0 when φ̄ < φ < 1, where φ̄ = 1 − (4k2 −θ 2 )2
.
∂φ ( 2 ( 2k − θ ) ( φ − 1 ) + k )
Furthermore, π 2 (u) is a convex function when φ̄ < φ < 1, and
∂2π
Since ∂φ 21 < 0, π 1 is concave and we get φ ∗ = 13 + 6(2kk −θ )2 . Since
2
thus lim π2 → +∞. Consequently, the optimal advertising level
u→+∞
is u∗II = +∞. two firms are symmetric, the profits under duopoly scenario are
Given φ ∈ (0, φ̄ ), π 2 (u) is a concave function. From the same. Let  = π1 − π2 denote the profit difference between
equation ∂ π2 /∂ u = 0 in Eq. (A.12) we get u = u0S = the initiator and the follower of the program. Substituting φ ∗ into
two firms’ profits functions, we get  = (2k−θ )23[k(2 k−aθ )2 −k 2 ] > 0.
2 2 2
2k (2kϕ2 +θ ϕ1 )(2ka2 +θ a1 )
(4k2 −θ 2 )2 (1−φ )−2k 2 (2kϕ2 +θ ϕ1 )2
. Similar to Proposition 1, we get
the optimal advertising level as follows, (ii) u = K
4ak −[(2k−θ )2 −k 2 ]K
 Similar to case (i), we get  = 2(2k−θ )2
. Since the
u0S if K ≤ u0S 3 k a 3 k a
u∗II = K if u0S < K < 2u0S (A.13) condition of u = K is 2[(2k−θ )2 −k 2 ]
< K < (2k−θ )2 −k 2 , then we get
0 if K ≥ 2u0S .  > 0.
14 L. Yu, X. He and J. Zhang et al. / Omega 98 (2021) 102104

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