Channel coordination through quality improvement with brand halo effect

Product quality depends on the quality investment of the manufacturer and quality decisions of the supplier. Therefore, many firms and researchers pay considerable attention to supply quality management. Considering a supply chain that includes two competing suppliers and one manufacturer, this paper investigates the influences of competition and the “brand halo” effect on the quality strategies of channel members, and explores the potential coordinating power of the bilateral participation contract. Utilizing differential game theory, this paper compares and analyzes the quality strategies of all channel members under three different scenarios: (i) decentralized scenario within a subsidy program, (ii) integrated scenario, and (iii) bilateral participation contract. Our results confirm the following results. (1) The manufacturer may not grant a subsidy to the supplier if two final products are highly competitive. (2) Supply chain members are more likely to join the bilateral participation contract if the “brand halo” effect is large. (3) The bilateral participation contract can achieve perfect coordination if the competition is weak or if a transfer payment policy exists.