AbstractAdvertising fee decisions in franchise systems are a frequent source of conflict between franchisors and franchisees. Such disagreements persist because the win-win potential of vertical cooperative advertising is not well appreciated. Our paper introduces a formal normative approach for analyzing, understanding and subsequently making these vertical cooperative advertising decisions within a franchising context in a manner that results in optimal system-wide returns. The model demonstrates that cooperative determination of franchisor's and franchisee's advertising contributions may yield superior payoffs for both exchange partners than the total payoff if the franchisor and franchisee seek to optimize their individual objective functions. Three types of models are developed and evaluated (i.e. deterministic, stochastic and under conditions of differing perceptions of the sales response functions to advertising). Conclusions hold under all three model variants. Industry implications are also presented.