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Optimal Price and Product Quality Decisions in a Distribution Channel

Author

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  • Xiaowei Xu

    (Department of Supply Chain Management and Marketing Sciences, Rutgers, The State University of New Jersey, Newark, New Jersey 07102)

Abstract

This paper studies a joint pricing and product quality decision problem in a distribution channel, in which a manufacturer sells a product through a retailer. The manufacturer jointly determines the wholesale price and quality of the product, and the retailer determines the retail price. We find that if the marginal revenue function is strictly concave, then the manufacturer chooses a lower product quality level than if selling the product directly to customers. If the marginal revenue function is affine, then the manufacturer's optimal product quality decision is independent of the distribution channel structure. If the marginal revenue function is strictly convex, then the manufacturer chooses a higher product quality level than if selling the product directly to customers.

Suggested Citation

  • Xiaowei Xu, 2009. "Optimal Price and Product Quality Decisions in a Distribution Channel," Management Science, INFORMS, vol. 55(8), pages 1347-1352, August.
    • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:8:p:1347-1352
    DOI: 10.1287/mnsc.1090.1023
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    References listed on IDEAS

    as
    1. J. Miguel Villas-Boas, 1998. "Product Line Design for a Distribution Channel," Marketing Science, INFORMS, vol. 17(2), pages 156-169.
    2. Xiaowei Xu & Wallace J. Hopp, 2009. "Technical Note---Price Trends in a Dynamic Pricing Model with Heterogeneous Customers: A Martingale Perspective," Operations Research, INFORMS, vol. 57(5), pages 1298-1302, October.
    3. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58(4), pages 347-347.
    4. Martin A. Lariviere, 2006. "A Note on Probability Distributions with Increasing Generalized Failure Rates," Operations Research, INFORMS, vol. 54(3), pages 602-604, June.
    5. Abel P. Jeuland & Steven M. Shugan, 1983. "Managing Channel Profits," Marketing Science, INFORMS, vol. 2(3), pages 239-272.
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