Optimal Price and Product Quality Decisions in a Distribution Channel

TLDR

The study investigates joint pricing and product quality decisions in a manufacturer–retailer distribution channel. The manufacturer jointly sets the wholesale price and product quality, while the retailer sets the retail price. When the marginal revenue function is strictly concave, the manufacturer selects lower quality than direct sales; if affine, quality is channel‑independent; if strictly convex, the manufacturer chooses higher quality.

Abstract

This paper studies a joint pricing and product quality decision problem in a distribution channel, in which a manufacturer sells a product through a retailer. The manufacturer jointly determines the wholesale price and quality of the product, and the retailer determines the retail price. We find that if the marginal revenue function is strictly concave, then the manufacturer chooses a lower product quality level than if selling the product directly to customers. If the marginal revenue function is affine, then the manufacturer's optimal product quality decision is independent of the distribution channel structure. If the marginal revenue function is strictly convex, then the manufacturer chooses a higher product quality level than if selling the product directly to customers.