In the model the manufacturers directly advertise their brand to consumers and also provide trade deals to the retailer. Each manufacturer's brand has a loyal segment of consumers who buy their favorite brand unless the competing brand is offered at a much lower price by the retailer. The number of loyal consumers is different for the two brands and so is the strength of their loyalty to their favorite brand. The manufacturers first decide advertising spending level, and then the wholesale price of their respective brands. The two manufacturers do not observe each other's decisions while making these decisions, however they do take into account how the other firm is likely to react as a function of their own decisions.
Advertising directly affects the strength of loyalty a consumer has for the favorite brand.
The two manufacturers provide trade deals to the retailer by discounting the brand from a regular wholesale price. The trade discounts are partially passed on to the consumers by the retailer who sets the retail prices of the two brands after observing the wholesale prices. The model and its analysis shed light on the role of brand loyalty in the optimal advertising and trade promotion policies for the two manufacturers. The analysis indicates that, if one brand is sufficiently stronger than the other and if advertising is cost effective, then the stronger brand loyalty requires less advertising than weaker brand loyalty, but a larger loyal segment requires more advertising than a smaller loyal segment. Moreover, stronger brand loyalty requires more trade promotion spending under these conditions.