Optimal quality and quantity provisions for centralized vs. decentralized distribution: Market size uncertainty effects

• Published in: European journal of operational research Vol. 265; no. 3; pp. 1144 - 1158
• Main Authors: Liu, Yan, Shi, Hongyan, Petruzzi, Nicholas C.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 16.03.2018
• Subjects: Distribution channel; Market uncertainty; Newsvendor model; OR in marketing; Product quality; OR in marketing; Product quality; Newsvendor model; Market uncertainty; Distribution channel
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2017.08.030

•Optimal quality & quantity provisions for centralized vs. decentralized distribution.•Market size uncertainty creates or increases the quantity differential.•Market size uncertainty decreases or even reverses the quality differential.•Channel decentralization can lead to higher product quality provision.•Effects of market uncertainty continue to hold under retail-level competition. We provide insights on how market size uncertainty affects the optimal quality (quantity) provision in distribution channels when consumers are heterogeneous in their willingness to pay for product quality. In this context, we denote the difference between the manufacturer’s optimal quality (quantity) provision for a centralized channel and its optimal analog for a decentralized channel as the quality (quantity) differential. We find that market size uncertainty creates or increases the quantity differential, but it does not affect the differential’s polarity. In contrast, market size uncertainty decreases the quality differential and it does so to the extent that, depending on the level of consumer heterogeneity, it reverses the differential’s polarity. Moreover, we find that the higher the inherent uncertainty level, the more pronounced are the effects. We likewise find that the effects of market size uncertainty are amplified if the notion of consumer heterogeneity is replaced with retail-level competition.