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The Effect Of Vertical Integration In The Quality Of Disposable Products

Author

Listed:
  • MARCOS SINGER

    (Escuela de Administración, Pontificia Universidad Católica de Chile)

  • PATRICIO DONOSO

    (Escuela de Administración, Pontificia Universidad Católica de Chile)

Abstract

This paper studies a single-product distribution channel where a manufacturer produces goods, some of which are defective, and a retailer, detecting only a subset of the defective goods, passes the rest along to customers, who end up discarding them. Conjecturing the structure of the demand and cost functions that assume customers to have a decreasing marginal aversion to bad quality while both the supplier and the retailer make marginally increasing efforts to avoid bad quality, we deduce several implicit parameters, including quality cost, based on observable data, such as the share of the channel margin. Once all the parameters of the model are available, we analyze the result of vertical integration. We not only confirm the well-known fact that vertical integration improves the quality perceived by the customer, but also characterize the attitude of the supplier, who may or may not provide a better service, in terms of the sum and the difference of logarithms of the margins.

Suggested Citation

  • Marcos Singer & Patricio Donoso, 2001. "The Effect Of Vertical Integration In The Quality Of Disposable Products," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 4(2), pages 133-155.
    • Handle: RePEc:pch:abante:v:4:y:2001:i:2:p:133-155
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Supply Chain; Quality; Vertical Integration; Nash Equilibrium;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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