Quality certification decision of online retail platform under heterogeneous manufacturers

Abstract

As a major instrument of quality assurance implemented in online business, quality certifications play pivotal roles in retailing platforms’ operations. This paper studies whether retail platforms can improve the product quality of sellers (manufacturers) through implementing quality certifications. We develop a game-theoretic model which consists of one retail platform and two competing manufacturers with differentiated brand positioning. Considering the platform can flexibly set the quality standard, we explore the quality certification for the platform where the quality and price decisions of the heterogeneous manufacturers can be affected. We find that the certification is profitable (unprofitable) for platform when the certification cost coefficient is low (high). Additionally, we identify two effects of the consumer preference on the certification: the low-preference effect and the high-preference effect, which have opposing impacts on the standard and the quality investment of certified manufacturers. Interestingly, smaller differences in brand positioning enhance the high-preference effect, which reflects the complementary role of the high-preference effect in expanding product vertical differentiation. Moreover, when implementing the certification, the platform may prefer to encourage only the high-end manufacturer to participate in the certification, as the different impacts of two preference effects render certification unprofitable for the low-end manufacturer. More interestingly, we find that the introduction of quality certification has a two-fold effect. It incentivizes participant (non-participant) to enhance (degrade) its product quality and price. Thus, the certification expands the vertical differentiation of the products on the platform.