Sales mode selection considering the consumer reference quality effect

This work investigates a two‐tier supply chain in which a supplier adjusts product quality and prices and distributes the products through a retailer or directly to consumers with the reference quality (RQ) effect. The supplier can choose from three, that is, traditional sales (TS), dual‐channel (DC), and online‐to‐offline (O2O), sales modes. In the O2O sales mode, the retailer is allowed to open an online channel. The market demands are determined by the consumer utility consisting of two parts, a part depending on the consumer RQ effect and the other depending on the retail price and product quality. The profit maximization, that is, the Stackelberg game, models involving the consumer RQ effect are developed using prospect theory, wherein the supplier has the first mover advantage. The analytical optimal solutions are obtained through backward induction. The optimal quality and pricing decisions and the optimal profits of the supply chain members are compared among the three sales modes. A practical application is analyzed to verify the theoretical results of the proposed models. The results show that the consumer RQ effect benefits the two supply chain members under certain conditions. The optimal quality and pricing decisions are significantly affected by the consumer RQ effect except those of the supplier under the O2O sales mode. When consumers have the RQ effect, the DC sales mode is the best choice for the supplier, is a win–win mode for the two supply chain members under certain conditions, and benefits the consumers the most among the three sales modes.