Consumer heterogeneity, product quality, and distribution channels

Hongyan Shi, Yunchuan Liu, Nicholas C. Petruzzi

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)1162-1176
Number of pages15
JournalManagement Science
Volume59
Issue number5
DOIs
StatePublished - May 1 2013

Keywords

  • Consumer heterogeneity
  • Consumer transaction cost
  • Distribution channel
  • Game theory
  • Product quality
  • Retail-level competition

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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