Quality differentiation and channel structure on online platforms

Abstract

We 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.