This paper examines cooperative advertising strategies in O2O supply chain made of a seller and an online platform agent. The seller sells a product to end market through both offline and online channels, the latter operated by the agent. We consider cooperative advertising strategies for this O2O supply chain and investigate three models, namely, Integration Model (I-Model), Unilateral co-op advertising model (U-Model), and Bilateral co-op advertising model (B-Model). We derive the optimal decisions of advertisement levels and participation rates between the supply chain members, and explore how they are linked to the interrelationship between the O2O channels and other system parameters. In addition, we provide comparison results among the three models and find that B-model can lead to significant benefits to the seller and the entire channel compared to U-model, especially under a high online profit share for the agent. However, the agent is undermined under B-model as he is obliged to share a portion of offline advertisement expenditure without corresponding compensations, which explains the difficulty in adopting bilateral advertising cooperation in real practice.

Introduction

Statistics show that 40 percent of worldwide internet users have bought products or goods online via desktop, mobile, tablet or other online devices. This amounts to more than 1 billion online buyers and is projected to continuously grow (Statistics.com, 2016). The transformative power of the internet continues to revolutionize industry, with new and better ways of doing business emerging on a daily basis. One such, O2O (Online to Offline), is making a splash in China and also flourishing globally as an innovative business mode. To simply put, O2O provides information, services, and booking discount to Internet users, who in return will be converted into the customers of the particular offline business partners. This business mode is particularly suitable to consumer goods and services, such as food and beverage, fitness, movies and beauty salon. A typical example is Meituan-Dianping, the largest group deals site in China, selling online vouchers of a wide range of services/entertainment products with the cooperation of providers conducting the services offline. In addition, many firms initiate the consolidation of their supply chains by developing online trading platforms and offline experience shops. For example, SAIC, an automobile manufacturing group in China, implements its O2O business model by integrating 4S shops with the website, www.chexiang.com, an online platform used to communicate with his consumers and facilitate e-payments. In western countries, O2O has not only been evolved by groupbuying websites like Groupon and LivingSocial but also traditional brick and mortar retailers like Nordstrom and Walmart.