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Consumer Heterogeneity, Product Quality, and Distribution Channels

Hongyan Shi, Yunchuan Liu, Nicholas C. Petruzzi

Management Science · 2013 · Volume 59 · Issue 5

DOI: 10.1287/mnsc.1120.1604

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. This paper was accepted by J. Miguel Villas-Boas, marketing.

Keywords

product quality, consumer heterogeneity, consumer transaction cost, distribution channel, retail-level competition, game theory

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