Consumer Heterogeneity, Product Quality, and Distribution Channels

TLDR

The study examines how distribution channel structure influences product quality depending on consumer heterogeneity and its market distribution. The authors find that with uniformly distributed consumer heterogeneity, decentralized channels can provide equal or lower product quality than centralized ones, but with more general willingness‑to‑pay distributions, decentralization can yield higher quality under certain conditions; uniform vertical and horizontal heterogeneity can also raise quality, while uniform vertical on two quality attributes does not, and retail competition amplifies these patterns. Accepted by J.

Abstract

This paper shows that the effect of different distribution channel structures on product quality depends on the type of consumer heterogeneity and its distribution in a market. When consumer heterogeneity is uniformly distributed either vertically on willingness to pay or horizontally on transaction costs, a manufacturer may provide the same or lower product quality in a decentralized channel than in a centralized channel. In contrast, when consumer heterogeneity follows a more general distribution on willingness to pay, under certain conditions, the manufacturer may provide higher product quality in a decentralized channel than in a centralized channel. Decentralization also may lead to a higher product quality if consumer heterogeneity is uniformly distributed both vertically and horizontally, but not if consumer heterogeneity is uniformly distributed vertically on each of two product-quality attributes. Additionally, competition at the retail level may amplify these findings. This paper was accepted by J. Miguel Villas-Boas, marketing.