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Consumer Heterogeneity, Product Quality, and Distribution Channels

Author

Listed:
  • 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)

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.

Suggested Citation

  • Hongyan Shi & Yunchuan Liu & Nicholas C. Petruzzi, 2013. "Consumer Heterogeneity, Product Quality, and Distribution Channels," Management Science, INFORMS, vol. 59(5), pages 1162-1176, May.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:5:p:1162-1176
    DOI: 10.1287/mnsc.1120.1604
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    References listed on IDEAS

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