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The Effect Of Vertical Integration In The Quality Of Disposable Products

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  • MARCOS SINGER

    ()
    (Escuela de Administración, Pontificia Universidad Católica de Chile)

  • PATRICIO DONOSO

    ()
    (Escuela de Administración, Pontificia Universidad Católica de Chile)

Abstract

This paper studies a single-product distribution channel where a manufacturer produces goods, some of which are defective, and a retailer, detecting only a subset of the defective goods, passes the rest along to customers, who end up discarding them. Conjecturing the structure of the demand and cost functions that assume customers to have a decreasing marginal aversion to bad quality while both the supplier and the retailer make marginally increasing efforts to avoid bad quality, we deduce several implicit parameters, including quality cost, based on observable data, such as the share of the channel margin. Once all the parameters of the model are available, we analyze the result of vertical integration. We not only confirm the well-known fact that vertical integration improves the quality perceived by the customer, but also characterize the attitude of the supplier, who may or may not provide a better service, in terms of the sum and the difference of logarithms of the margins.

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File URL: http://eacc10.puc.cl/files/ABT/Contenidos/Vol-4-N2/1Singer%20Donoso.pdf
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Bibliographic Info

Article provided by Escuela de Administracion. Pontificia Universidad Católica de Chile. in its journal ABANTE.

Volume (Year): 4 (2001)
Issue (Month): 2 ()
Pages: 133-155

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Handle: RePEc:pch:abante:v:4:y:2001:i:2:p:133-155

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Web page: http://eacc10.puc.cl/RePEc/pch/
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Related research

Keywords: Supply Chain; Quality; Vertical Integration; Nash Equilibrium;

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  1. Wei Shi Lim, 2001. "Producer-Supplier Contracts with Incomplete Information," Management Science, INFORMS, vol. 47(5), pages 709-715, May.
  2. Vrinda Kadiyali & Pradeep Chintagunta & Naufel Vilcassim, 2000. "Manufacturer-Retailer Channel Interactions and Implications for Channel Power: An Empirical Investigation of Pricing in a Local Market," Marketing Science, INFORMS, vol. 19(2), pages 127-148, September.
  3. Voros, Jozsef, 2002. "Product balancing under conditions of quality inflation, cost pressures and growth strategies," European Journal of Operational Research, Elsevier, vol. 141(1), pages 153-166, August.
  4. Reyniers, Diane J. & Tapiero, Charles S., 1995. "Contract design and the control of quality in a conflictual environment," European Journal of Operational Research, Elsevier, vol. 82(2), pages 373-382, April.
  5. Wilfred Amaldoss & Robert J. Meyer & Jagmohan S. Raju & Amnon Rapoport, 2000. "Collaborating to Compete," Marketing Science, INFORMS, vol. 19(2), pages 105-126, November.
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