Abstract: When the market demand is sensitive to sales price and the advertising efforts, both manufacturer and retailer in a supply chain must make decisions on their advertising effort levels and price discount. Based on the new demand function which is simultaneously affected by advertising efforts and direct price discount offered by the manufacturer to consumers, the optimal advertising efforts strategy of the supply chain and direct price discount of the manufacturer are mainly discussed by comparing four game models, which are Nash Equilibrium, Stackelberg game model in which the manufacturer is leader, Stackelberg game model in which the retailer is leader and cooperative game. The study finds that only when price elasticity meets a certain level, the manufacturer is willing to offer direct discount to consumers. Besides, the greater the price elasticity is, the more discount will be given and consumers can get the maximum discount in cooperative model. Once the manufacturer gives consumers the optimal price discount, the advertising efforts of both the manufacturer and the retailer are found to be positively correlated with the price elasticity. In addition, there is a certain proportion between their advertising costs. One player can estimate the other's cost of advertisement in accordance with its own advertising cost. In comparison of the optimal strategies in above four models, the results reveal that the advertising efforts by both manufacturer and retailer in cooperative model, as well as price discount the manufacturer providing to the consumers, are greater than those in the other models; thus, the maximal profit of a supply chain can be obtained using cooperative strategy. Finally, Pareto improvement is used to coordinate the cooperative game model to realize the multi-wins situation of both players of supply chain and consumers. All findings above can guide players to make optimal selection of cooperative models, advertising efforts strategy and price discount strategy.

Key words: advertising efforts level, direct price discount of manufacturer, game, Pareto improvement