Product Quality And Distribution Channels
AbstractWe introduce strategic behaviour in assigning a certain distribution channel to a product of a particular quality. We propose a variety of models to analyze and study some of the determinants of the choice of distribution channels. Taking the Gabszewicz and Thisse's (1979) model as a benchmark, we first study whether there exist strategic incentives for delegation of sales in a vertically differentiated duopoly. Secondly, product quality is associated with a particular distribution channel. Finally, the model is extended to account for multi-quality production. The resulting equilibria of every game depend on the relative market profitability, the degree of vertical differentiation (i.e. the relative marginal utility of income for quality and the non-buying option), and hence on the intensity of inter-quality and intra-quality competition. In all of the games analyzed, delegation appears as an equilibrium action. In the first game it is a dominant action for both manufacturers. In the second game, at least one of the manufacturers delegates sales. Whether it is one or both crucially depends on market profitability for each quality and the intensity of inter-quality competition. In the third of the games, the single-product manufacturer delegates sales at equilibrium whereas the multi-product manufacturer delegates only one of the qualities. The multi-product manufacturer employs wholesale prices together with the decision of not delegating both qualities to optimally combine the trade-off between the intensity of intra-quality competition and intra-firm competition.
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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2000-19.
Length: 44 pages
Date of creation: Oct 2000
Date of revision:
Publication status: Published by Ivie
vertical differentiation; distribution channels; multi-quality production.;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- L29 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Other
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