Should a Manufacturer Encroach on Its Retailer’s Operations with Quality Differentiated Products?

Despite the fact that manufacturers are progressively encroaching into the retail market by selling products that differ in quality from the products that are already on the market, this issue has received little attention in the literature on dual-channel supply chains. We fill this gap by first considering that a manufacturer sells higher- (lower-) quality products through its own direct channel, whereas all lower- (higher-) quality products are distributed by an independent retailer, and then comparing our equilibrium outcomes with those in the literature of the manufacturer who distributes homogeneous products through both channels. Our results show that, compared to selling lower-quality products directly or offering homogeneous products through both channels, an effort by the manufacturer that is too aggressive in its attempt to encroach on the retail market (i.e., selling higher-quality products directly) not only decreases the retailer’s profits but also reduces the manufacturer’s own profitability. Furthermore, we find that, compared with offering homogeneous products through both channels, selling lower-quality products directly is always beneficial for the retailer but hurts consumers.