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Selling vertically differentiated products under one channel or two? A quality segmentation model for differentiated distribution channels

Chai, Junwu; Yan, Wei; Li, Youwei; Palmer, Mark; Huang, Qilin


Junwu Chai

Wei Yan

Youwei Li

Mark Palmer

Qilin Huang


Many manufacturers, including Lenovo, Sony, Procter & Gamble, and Buckle, have adopted differentiated distribution channels to market vertically differentiated products. However, there is scant literature addressing the issue of quality differentiation in the presence of differentiated distribution channel policies. To fill this void, we examine whether (how) differentiated channel policies affect manufacturers’ quality differentiation and all parties’ performance. Specifically, we consider a manufacturer who produces two vertically differentiated products (high- and low-tier ) together, but with
two marketing options: (1) distributing both products through one retailer (Model O, One-channel policy), or (2) providing high-quality products through one channel but low-tier products through another (Model T, Two-channel policy). Our results show that the manufacturer is more likely to decrease the level of quality differentiation in Model T than in Model O. Moreover, contrary to popular belief, we show that “quality distortion” is not limited to low-tier products but can occur with high-tier products. Among other results, we find that the one-channel policy benefits the retailer but hurts both the manufacturer and the total supply chain. To test the robustness of the results, we also comment on how the additional horizontal consumer heterogeneity affects our results and the implications of the competition at the manufacturer level.

Journal Article Type Article
Publication Date Jun 6, 2019
Journal Journal of the Operational Research Society
Print ISSN 0160-5682
Publisher Palgrave Macmillan
Peer Reviewed Peer Reviewed
Keywords Manufacturing/marketing interface; Quality segmentation; Channel policy; Game theory
Publisher URL

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