۱- Introduction

۲- Related literature

۳- Basic model: luxury fashion supply chains

۴- Optimal advertisement strategies and coordination

۵- Extended analysis: market share considerations

۶- Conclusion

References

Abstract

Advertisement is critical in luxury fashion supply chains. In this paper, we analytically explore the optimal advertisement budget allocation strategy and coordination challenge when there are multiple brand-tier products in the market. In the basic model, we focus our analyses with respect to different risk attitudes that the luxury fashion brand takes and the coordination mechanisms. We show that irrespective of risk attitudes of the luxury fashion brand, the optimal advertisement strategy is a polarized strategy. We derive the coordination mechanisms to overcome the double marginalization effect for each risk attitude case. In the extended model, with the market share considerations, the optimal advertisement strategy is derived and is shown to be no longer polarized in general.

Concluding remarks and major findings

Motivated by the importance of optimal advertisement budget allocation and channel coordination for luxury fashion supply chains with different multiple brand-tier products, we have conducted an analytical study in this paper. Some important findings and managerial insights are summarized below. Optimal advertisement budget allocation strategies: We have analytically proven that in the basic model when there is no consideration of market share, the optimal advertisement budget allocation strategies are always polarized for all kinds of risk attitudes under the MSD objective (see Proposition 4.1). This is a very interesting result as it shows something different from the literature. To be specific, Chiu et al. (2018) show that the risk averse luxury fashion brand may diversify risk by allocating the advertisement budget between two groups of consumers and only the risk neutral luxury fashion brand will adopt the polarized strategy. Our finding shows a different result when we consider the presence of two different brand-tier products, instead of two groups of consumers. This hence calls for a more careful planning of the optimal advertisement budget allocation between different situations. Special attention should be paid to the specific problem domain and scope of the problem. Coordination mechanism: It is commonly known that the TPT contract is widely used in the luxury fashion industry. Thus, we have explored how versatile supply chain contracting mechanisms can be developed on top of it. As we have proven in Proposition 4.2, to coordinate the luxury fashion supply chain with both the higher-tier and lower-tier products, the luxury fashion brand’s risk attitude is a critical factor. To be specific, we have found that when the luxury fashion brand is risk neutral, the TPT contract which adopts the classic “supply at cost with credit transfer” approach is good enough to coordinate the channel. However, once the luxury fashion brand is risk averse or risk seeking, we need to apply a more sophisticated contract with more parameters in order to achieve channel coordination. In particular, when the luxury fashion brand is risk averse, the sales rebate TPT contract can help entice the luxury fashion brand to set the optimal advertisement budget allocation the same as the supply chain system’s optimal decision. When the luxury fashion brand is risk seeking, the case is trickier as we need to apply a revenue sharing TPT contract to help coordinate the channel.