Product quality in the distribution channel for retail food products

This study investigates the relationship between the manufacturer and the retailer in the distribution channel. The primary focus is the use of product quality as a strategic tool for the manufacturer to improve his overall and relative performance inside the channel. The base model discusses one manufacturer and one retailer interacting in various conditions. First, we look at the variation of the manufacturer's control of quality in the distribution channel under the single product scenario. In the static setting, the impacts of quality on the manufacturer and retailer's pricing decisions and their relative performances depend on the quality cost function specifications. The linear cost schedule for quality produces the more profitable situation for the retailer. On the other hand, the manufacturer performs better in the convex cost specification, suggesting the increasing difficulty in modifying the product quality benefits the manufacturer. The simulations for the static models show that an increase in the quality cost hurts the manufacturer more than the retailer; whereas an increase in elasticity positively affects the manufacturer in larger magnitude than the retailer. The multi-period model for the single product quality addresses quality as an investment-like aspect. In our setup, the consumer demand is influenced by the stock of quality, which can be the reputation or the accumulated brand name generated by the quality flow in each period. The optimal quality decisions indicate the existence of the optimal quality stock level, where, using the quality flow, the manufacturer adjusts his quality stock gradually to the optimal long-run level regardless of whether the initial stock is above or below the optimal level. Despites the constant unit cost of quality, the solution for the optimal path recommends the gradual adjustment instead of the rapid approach.;Next, we consider a more competitive setting between the manufacturer and the retailer in the distribution channel through the use of the private label product. The retailer offers a similar product to the national brand product. We derive a demand specification from the reservation price schedule and the consumer distribution. We find that the national brand manufacturer generally tries to differentiate his product from the private label through the use of product quality. The increase in the national brand product quality benefits the retailer to a greater extent since the improved national brand product allows the retailer to increase the private label retail price without having to improve its characteristics as consumers switch from the national brand to the private label products. Both the increase in the quality cost and the private label quality improvement produce similar outcomes for prices, product quality and market shares. Both the increase in quality cost and the improvement in the private label quality increase the quality differentiation, raise all retail prices and reduce the demand for the national brand product. Because of the high increase in the national brand price, the retailer can gain higher profit through the increase in the private label price and the expansion of its demand.;We extend our distribution channel model to address the situation where the national brand manufacturer supplies the private label product to the retailer. Again, the optimization specification influences the outcomes. We modify the demand to allow for non-purchase customers who may decide to start purchasing later. When the retailer chooses both the national brand and the private label retail prices, we find that the optimal supply and pricing decisions for each product depend entirely on the cost and quality parameters for each of the products. The parameters of the national brand production do not affect the decisions for the private label production. On the other hand, when the retailer imposes a fixed markup for the manufacturer's retail pricing, we observe the connections between the parameters of the two products in all of the optimal outcomes. The decision of the national brand manufacturer to supply the private label product depends on the production costs and the product quality levels of both products, as well as the relative quality between the national brand and the private label products.;Using the Dominick's Finer Food scanner database, we investigate the theoretical results empirically. Because of the lack in the direct quality information, we use proxies and indicators instead of the actual product quality level. We identify the products with improvements and the national brand and private label pairings for the empirical tests for the single product model and the national brand and private label competition model, respectively. We use the price difference as the primary proxy for the quality difference and quality level, as well as considering the elasticity influences on the quality and other market outcomes for the case of product improvement. (Abstract shortened by UMI.)...