Quality differentiation and e‐tailer's choice between reselling and agency selling

Many manufacturers sell products through both the e‐retail and direct channels, which may lead to channel conflicts. To alleviate this, quality differentiation becomes an important marketing strategy for the manufacturer. However, few studies investigate how the form of the e‐tailer's selling contract affects the manufacturer's distribution strategy. Here, we investigate this by establishing a game model in which a manufacturer sells two products with similar functions, but different quality levels, through the direct channel and an e‐tailer. The manufacturer may distribute high‐ and low‐quality products through the direct and e‐tailer channels, respectively, or vice versa. The e‐tailer can choose either the reselling or agency selling contracts. We find that the impact of quality differentiation on equilibria depends on the distribution strategy, contract form, and level of product competition. Under the reselling contract, the manufacturer (he) should distribute high‐quality products directly if the relative efficiency of low‐ to high‐quality products is low. Under the agency selling contract, he should distribute low‐quality products directly if the relative efficiency is moderate. Finally, the e‐tailer (she) should choose the agency selling contract if the production cost is moderate, regardless of the manufacturer's distribution strategy.