Consumer Heterogeneity, Product Quality, and Distribution Channels

Hongyan Shi (), Yunchuan Liu () and Nicholas C. Petruzzi ()
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Hongyan Shi: Nanyang Business School, Nanyang Technological University, Singapore 639798
Yunchuan Liu: College of Business, University of Illinois at Urbana--Champaign, Champaign, Illinois 61820
Nicholas C. Petruzzi: College of Business, University of Illinois at Urbana--Champaign, Champaign, Illinois 61820

Management Science, 2013, vol. 59, issue 5, 1162-1176

Abstract: This paper shows that the effect of different distribution channel structures on product quality depends on the type of consumer heterogeneity and its distribution in a market. When consumer heterogeneity is uniformly distributed either vertically on willingness to pay or horizontally on transaction costs, a manufacturer may provide the same or lower product quality in a decentralized channel than in a centralized channel. In contrast, when consumer heterogeneity follows a more general distribution on willingness to pay, under certain conditions, the manufacturer may provide higher product quality in a decentralized channel than in a centralized channel. Decentralization also may lead to a higher product quality if consumer heterogeneity is uniformly distributed both vertically and horizontally, but not if consumer heterogeneity is uniformly distributed vertically on each of two product-quality attributes. Additionally, competition at the retail level may amplify these findings. This paper was accepted by J. Miguel Villas-Boas, marketing.

Keywords: product quality; consumer heterogeneity; consumer transaction cost; distribution channel; retail-level competition; game theory (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (82)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:59:y:2013:i:5:p:1162-1176

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