Quality differentiation and channel structure on online platforms

Abstract

AbstractWe examine how quality differentiation affects a manufacturer's channel strategy when selling through an offline retailer and a platform. The manufacturer can choose to distribute high‐ or low‐quality products online/offline via agency or reselling channels. We demonstrate that agency selling (reselling) is optimal when the commission rate is low (otherwise). Moreover, the manufacturer chooses to sell high‐quality (low‐quality) goods online if the cost difference between the two quality levels is low (high). Interestingly, as the quality difference increases, the manufacturer is more likely to offer high‐quality goods online. The platform and the retailer cannot benefit from the manufacturer's decisions simultaneously.