Purpose: To show the effect of different distribution channel structures on product quality depends on the type of consumer heterogeneity and its distribution in a market and a manufacturer may provide the same or lower product quality in a decentralized channel than in a centralized channel. Summary: A manufacturer can have own distribution channel - a centralized channel or indirectly through an independent retailer-a decentralized channel. There may be occasions where the manufacturer faces legal restrictions to sell directly in some areas such as wineries not allowed to sell to the customers in distant states. Similarly such restrictions are in place for selling some products across national boundaries. When such restrictions are in place, the manufactures sell their products through distributors. Some manufactures sell their premium products directly while some others sell their Iow-quality products directly. These show that channel structure and product design and pricing need not have to be matched. This paper examines the product features that are appropriate for a distribution channel and explores the key factors that determine the same. The paper develops a game-theoretic model to decide the optimal quality decisions when selling through both centralized and decentralized distribution channels based on consumer heterogeneity. The results show that when consumers are heterogeneous only vertically on their willingness to pay and follow a uniform distribution, the manufacturer in a decentralized channel offers the same or lower product quality than in a centralized channel. (30 refs.)
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