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

Abstract

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.

Citation

Chai, J., Yan, W., Li, Y., Palmer, M., & Huang, Q. (2019). Selling vertically differentiated products under one channel or two? A quality segmentation model for differentiated distribution channels. Journal of the Operational Research Society, https://doi.org/10.1080/01605682.2019.1605469

• Journal Article Type: Article
• Acceptance Date: Apr 5, 2019
• Online Publication Date: Jun 6, 2019
• Publication Date: Jun 6, 2019
• Deposit Date: May 10, 2019
• Publicly Available Date: Jun 7, 2020
• Journal: Journal of the Operational Research Society
• Print ISSN: 0160-5682
• Electronic ISSN: 1476-9360
• Publisher: Taylor and Francis
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1080/01605682.2019.1605469
• Keywords: Manufacturing/marketing interface; Quality segmentation; Channel policy; Game theory
• Public URL: https://hull-repository.worktribe.com/output/1765175
• Publisher URL: https://www.tandfonline.com/doi/full/10.1080/01605682.2019.1605469
• Contract Date: May 10, 2019