Channel selection of a monopoly manufacturer in a two-tier vertically differentiated market

This study investigates a two-tier vertically differentiated market where an upstream monopoly manufacturer produces both high and low quality products and two downstream retailers provide high and low service separately. The primary goal of this study is to examine which service-differentiated outlet the manufacturer should select to distribute its quality-differentiated products. We found that the manufacturer's profits are mainly affected by the retailer's service costs. If the high service does not exceed 0.21, the optimal channel is to distribute both varieties through a high service retailer. If the low service ranges between 0.25 and 0.5, selling both varieties through a low service retailer is the optimal selection for the manufacturer.