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

Yan Liu, Hongyan Shi, Nicholas C. Petruzzi

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1144-1158
Number of pages15
JournalEuropean Journal of Operational Research
Volume265
Issue number3
DOIs
StatePublished - Mar 16 2018

All Science Journal Classification (ASJC) codes

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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