Reselling or Agency Selling? Consumer Valuation, Quality Design, and Manufacturers' Competition

Abstract

The retail e-commerce yields lucrative revenue in many industries. In this work, we provide a strategic perspective by investigating how consumer valuation, product quality, and manufacturers’ competition influence the choice of selling agreement using stylized models. The utility and valuations of consumers are involved in analyzing strategic decisions under different selling agreement that is not trivial to analyze. We first show that agency selling agreement induces a higher retail price, but this can benefit the entire channel; under this agreement, the agency fee and consumer valuation present a nonmonotonic (approximately U-shaped) relation. Even though double marginalization exists, reselling agreement induces the manufacturer to make low-quality product compared to the agency selling agreement, but such a low-quality product is only profitable for the manufacturer. Second, when introducing manufacturers' competition, agency selling agreement can induce a wider quality difference: higher high-quality and lower low-quality. Agency selling agreement also hurts the manufacturer and the entire channel, but this is a preferred format for the low-quality manufacturer. Both the high-quality manufacturer and the entire channel and are profitable to choose the reselling agreement; offering a high-quality product can hurt the manufacturer remains robust. Third, the first-mover manufacturer can get a lower profit than the follower retailer. Moreover, when comparing scenarios with alternative sequences of making decisions, first-mover can lead to disadvantage, in that both supply chain parties prefer to act later rather than earlier. Our work also explains the rationale about why e-commerce firms in China now pay more attention to low-end consumers.