Effects of consumers’ uncertain valuation-for-quality in a distribution channel

Abstract

Consumer uncertainty about product valuation is a significant economic issue in online retailing. In many markets, even though the product quality information is completely disclosed, consumers may still remain unsure about their valuation-for-quality. This paper investigates the effects of consumers’ uncertain valuation-for-quality on a platform’s and a firm’s profits under commonly used wholesale price contract and consignment contract in a distribution channel. Our analysis reveals that regardless of the contract types, when the product quality is relatively low, both the platform and the firm benefit from a higher degree of informativeness of information; when the product quality is relatively high, however, the profits of both the platform and the firm show nonmonotonicity with respect to the informativeness degree (namely, first decrease then increase), which is driven by the joint effects of the value-enhancement effect and the segmentation effect incurred from the consumers’ uncertain valuation-for-quality. Additionally, we find that when the quality is of medium level, the firm and the platform may achieve a consensus on contract preferences on the wholesale price contract or the consignment contract, critically dependent on the informative degree.