Dominant retailers’ incentives for product quality in asymmetric distribution channels

Abstract

This paper investigates the diverging incentives for product quality in a channel with two asymmetric retailers and a common supplier. When retailers differ in terms of service provision and channel power, changes in manufactured quality cause channel conflicts. In particular, our results show that if the low service retailer becomes dominant in the channel, it may induce a low level of quality that is detrimental for the other members of the channel. The low service retailer benefits from quality reduction first by improving its competitive standing against its rival retailer by lessening the importance of quality for consumer choice and second by strengthening its relative bargaining position vis-a-vis its supplier. Our results also show that consumer surplus may increase as a result of quality reduction.