Selling Co-Products through a Distributor: The Impact on Product Line Design

Tao Lu, Ying Ju Chen, Brian Tomlin, Yimin Wang

Research output: Contribution to journalArticle

2 Scopus citations

Abstract

A vertical co-product technology simultaneously produces multiple outputs that differ along a rankable quality metric. Co-product manufacturers often sell products through a distributor. We examine a setting in which a manufacturer sells vertically differentiated co-products through a self-interested distributor to quality-sensitive end customers. The manufacturer determines its production, product line design, and wholesale prices. The distributor determines its purchase quantities and retail prices. In traditional product-line design, products can be produced independently of each other and higher-quality products have higher production costs. This literature established that the length of the product line (i.e., difference between highest and lowest qualities) is greater in an indirect channel than in a direct channel. By contrast, co-products cannot be produced independently of each other. Among other findings, we establish that this interdependency causes the opposite channel effect: for co-products, the length of the product line is smaller in an indirect channel than in a direct channel. Additionally, we show that there exists a theoretical contract, combining revenue sharing and reverse slotting fees, that eliminates the indirect channel distortions in both product line design and output quantities.

Original languageEnglish (US)
Pages (from-to)1010-1032
Number of pages23
JournalProduction and Operations Management
Volume28
Issue number4
DOIs
StatePublished - Apr 1 2019

Keywords

  • co-product
  • indirect channel
  • product line design

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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