Agency or wholesale? Strategic analysis of the influence of distribution strategy on product line design with endogenous quality

Abstract

Nowadays, the single-product strategy can no longer meet the diversified needs of consumers, and retail platforms give firms different sales model choices (agency or wholesale). Therefore, revealing the interaction between product line design and distribution strategy has become an important practical problem that needs to be solved urgently. By constructing an endogenous quality Stackelberg game model, we analyzed the optimal production and pricing decisions of firms and platforms under different sales models. By comparing the equilibrium results, we find that both the firm and the platform can benefit from the product line extension. When the platform’s profit-sharing proportion is in a specified middle range, the firm and platform can reach a consensus on the distribution strategy. Moreover, even if there is no cost to extend the product line, the firm does not choose to extend the product line when the platform charges a large proportion of the revenue.