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Selling Co‐Products through a Distributor: The Impact on Product Line Design

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  • Tao Lu
  • Ying‐Ju Chen
  • Brian Tomlin
  • Yimin Wang

Abstract

A vertical co‐product technology simultaneously produces multiple outputs that differ along a rankable quality metric. Co‐product manufacturers often sell products through a distributor. We examine a setting in which a manufacturer sells vertically differentiated co‐products through a self‐interested distributor to quality‐sensitive end customers. The manufacturer determines its production, product line design, and wholesale prices. The distributor determines its purchase quantities and retail prices. In traditional product‐line design, products can be produced independently of each other and higher‐quality products have higher production costs. This literature established that the length of the product line (i.e., difference between highest and lowest qualities) is greater in an indirect channel than in a direct channel. By contrast, co‐products cannot be produced independently of each other. Among other findings, we establish that this interdependency causes the opposite channel effect: for co‐products, the length of the product line is smaller in an indirect channel than in a direct channel. Additionally, we show that there exists a theoretical contract, combining revenue sharing and reverse slotting fees, that eliminates the indirect channel distortions in both product line design and output quantities.

Suggested Citation

  • Tao Lu & Ying‐Ju Chen & Brian Tomlin & Yimin Wang, 2019. "Selling Co‐Products through a Distributor: The Impact on Product Line Design," Production and Operations Management, Production and Operations Management Society, vol. 28(4), pages 1010-1032, April.
  • Handle: RePEc:bla:popmgt:v:28:y:2019:i:4:p:1010-1032
    DOI: 10.1111/poms.12966
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    References listed on IDEAS

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    11. Xu, Shengshuo & Ling, Liuyi & Du, Shaofu & Liu, Lindong, 2023. "Crowdfunding or traditional mode? Strategy choices in product selling," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 172(C).

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