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Does channel decentralization lead to low quality product lines?

Hwan Chung (School of Business Administration, Chung-Ang University, Seoul, Republic of Korea, and)
Eunkyu Lee (Department of Marketing Management, Syracuse University, Syracuse, New York, USA)

European Journal of Marketing

ISSN: 0309-0566

Article publication date: 2 September 2014

1890

Abstract

Purpose

The purpose of this study is to analyze the problem of optimal product line design in marketing channels.

Design/methodology/approach

This paper develops a game theoretic model, in which a firm markets a line of a limited number of products at different quality levels to serve a market composed of multiple consumer segments. The consumer segments are modeled as clusters of somewhat heterogeneous consumers as typically observed in the real world. These model characteristics allow us to consider a broader set of targeting strategies such as sub-segmentation and partial cannibalization which have not been considered previously. By considering both a vertically integrated channel and a decentralized channel, we investigate how channel structure influences optimal product line design. We analyze the model mathematically with supplemental numerical analyses.

Findings

Our analysis shows that “quality distortion” in product line design is not limited to the low-end product, as previously reported, but can happen to the high-end product. The direction of these quality distortions may be downward or upward, leading to either increased or decreased differentiation between the two products. Furthermore, channel decentralization makes it more likely for the firm to strategically choose upward partial cannibalization or sub-segmentation. Consequently, contrary to previous studies, we demonstrate that there exist conditions under which channel decentralization leads to higher product quality.

Originality/value

Our model reflects a more realistic market environment and a firm’s practical constraints than previous studies, which typically assume perfect homogeneity within each segment and/or the feasibility of offering an infinite number of products. This extension produces interesting new results and insights that provide more practical implications for a firm’s optimal product line design strategy.

Keywords

Citation

Chung, H. and Lee, E. (2014), "Does channel decentralization lead to low quality product lines?", European Journal of Marketing, Vol. 48 No. 9/10, pp. 1870-1891. https://doi.org/10.1108/EJM-06-2013-0335

Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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