Feedback Stackelberg-Nash Equilibria in Mixed Leadership Games with an Application to Cooperative Advertising

Abstract

In this paper we characterize the feedback equilibrium of a general infinite-horizon Stackelberg-Nash differential game where the roles of the players are mixed. By mixed we mean that one player is a leader on some decisions and a follower on other decisions. We prove a verification theorem that reduces the task of finding equilibrium strategies in functional spaces to two simple steps: First solving two static Nash games at the Hamiltonian level in a nested version and then solving the associated system of Hamilton-Jacobi-Bellman equations. As an application, we study a novel manufacturer-retailer cooperative advertising game where, in addition to the traditional setup into which the manufacturer subsidizes the retailer’s advertising effort, we also allow the reverse support from the retailer to the manufacturer. In this representative case, we find an equilibrium that can be expressed by a solution of a set of algebraic equations. We then conduct an extensive numerical study to assess the impact of model parameters on the equilibrium.

Keywords: Stackelberg differential game, Nash differential game, feedback solution, cooperative advertising

JEL Classification: C61, C71, C73, M30, M11, M20, M31, M37