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Optimal Price and Product Quality Decisions in a Distribution Channel

Department of Supply Chain Management and Marketing Sciences, Rutgers, The State University of New Jersey, Newark, New Jersey 07102
xiaoweix{at}andromeda.rutgers.edu

This paper studies a joint pricing and product quality decision problem in a distribution channel, in which a manufacturer sells a product through a retailer. The manufacturer jointly determines the wholesale price and quality of the product, and the retailer determines the retail price. We find that if the marginal revenue function is strictly concave, then the manufacturer chooses a lower product quality level than if selling the product directly to customers. If the marginal revenue function is affine, then the manufacturer's optimal product quality decision is independent of the distribution channel structure. If the marginal revenue function is strictly convex, then the manufacturer chooses a higher product quality level than if selling the product directly to customers.

Key Words: failure rates; pricing; product quality; distribution channel
History: Received: April 15, 2008; accepted: March 15, 2009.