Implications of the Product Quality Differentiation on the Platform's Distribution Contracts

Abstract

In reality, online platforms can not only act as product resellers but also can serve as the marketplace between manufacturers and customers. However, the existing literature rarely explores how product quality affects a platform's optimal selling mode. This article establishes a theoretical model in which two competing manufacturers sell their products through an online platform. The platform may choose the reseller mode, agency mode, or hybrid mode (operate both the reseller and agency modes) to distribute the products. We mainly explored how the product quality differentiation between two manufacturers affects the platform's distribution contract. The results show that when the agency fee is relatively low, the platform should always adopt the reseller mode. However, when the agency fee is relatively high, the platform's choice will depend on the level of product quality differentiation. More specifically, when the product quality differentiation is relatively high, the hybrid mode is the best choice; and when it is relatively low, the reseller mode is the best choice. In addition, the low-quality manufacturer may be worse off after an improvement in product quality, and the platform may also become worse off as the product quality differentiation decreases. Finally, when considering the impact of network effects, the platform will be less likely to choose the hybrid mode as the degree of network effect intensity increases.