On Marketing Channel Structures and Quality Choices

This study applies the vertical differentiation model to issues of channel choice. The primary goal is to examine how channel structures may influence a firm's strategies and consumer welfare. Because our concerns are more about coordination rather than competition, the effects of strategic interaction are dominated by the two manufacturers and one retailer channel configuration. We observe that the decentralized firm has incentives to extend the degree of quality differentiation to relax price competition. Moreover, retail price and quality move in the same direction. We also find that the consumer's surplus, producer's surplus and social welfare are the largest when both manufacturers are integrated, but the smallest when both manufacturers are decentralized.