EXPRESS: Service Provision in Distribution Channels

Abstract

Consumers may need help using an inherently complex product after purchase. This paper studies a manufacturer’s and a retailer’s incentives to provide pre-sales service and after-sales support in a distribution channel. The authors consider a model in which a manufacturer makes wholesale-price and channel-service decisions. Subsequently, a retailer makes retail-price and channel-service decisions. They find that, in the equilibrium, both channel members provide pre-sales service. If the fixed-cost investment needed to enhance the effectiveness of after-sales support is small, the manufacturer lets the retailer provide after-sales support. But when it is above a threshold and the retailer becomes unwilling to invest in providing after-sales support, the manufacturer steps in and invests in providing it. As expected, when the fixed cost is too large, the manufacturer also opts out of providing after-sales support. Interestingly, when the retailer provides after-sales support, the level of pre-sales service and the demand for after-sales support can simultaneously be the highest among all configurations. Finally, the authors demonstrate the robustness of their main results by studying alternative channel-service configurations.