Title: Channel selection of a monopoly manufacturer in a two-tier vertically differentiated market

Authors: Bo-Tai Tzeng; Wei-Wei Lee

Addresses: Center of General Education, Min-Hwei College of Health Care Management, Tainan, 73658, Taiwan ' Department of Economics, National Dong Hwa University, Hualien, 97401, Taiwan

Abstract: This study investigates a two-tier vertically differentiated market where an upstream monopoly manufacturer produces both high and low quality products and two downstream retailers provide high and low service separately. The primary goal of this study is to examine which service-differentiated outlet the manufacturer should select to distribute its quality-differentiated products. We found that the manufacturer's profits are mainly affected by the retailer's service costs. If the high service does not exceed 0.21, the optimal channel is to distribute both varieties through a high service retailer. If the low service ranges between 0.25 and 0.5, selling both varieties through a low service retailer is the optimal selection for the manufacturer.

Keywords: monopoly manufacturers; two-tier markets; vertical differentiation; channel selection; manufacturer Stackelberg; two-part tariff; service costs; one-level channel; differentiated qualities; differentiated services.

DOI: 10.1504/IJEBR.2014.063941

International Journal of Economics and Business Research, 2014 Vol.8 No.1, pp.47 - 62

Received: 20 Apr 2013
Accepted: 27 Jun 2013
Published online: 29 Aug 2014 *

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