Quality Differentiation in a Dual-Channel Supply Chain

Abstract

We investigate a dual-channel supply chain with a retailer (she) and a manufacturer (he) who can manufacture a high-quality product and a low-quality product. The manufacturer can choose to sell the high-quality and low-quality products in online/direct and traditional channels, respectively. He can also choose to sell the low-quality and high-quality products in online/direct and traditional channels, respectively. A classic finding in the literature is that the manufacturer should sell the high-quality product through the online channel. However, our analysis reveals that products can be classified into cost-type and demand-type. The former indicates that product cost is more sensitive than customer demand to product quality level while the latter indicates that customer demand is more sensitive to quality level. Our results show that the classic finding holds only for demand-type products. For cost-type products, the manufacturer should sell the low-quality product online. Furthermore, we extend our basic model and show that the retailer can cope with the manufacturer’s quality differentiation by introducing a new alternative supplier, even when the supplier charges a higher wholesale price.