Channel management and product design with consumers’ probabilistic choices

In this paper, we study how a seller should design the prices and qualities of products or services offered in both a direct channel and an indirect channel when facing consumers with probabilistic purchasing behaviour. We first consider three schemes under personalised offering: independent pricing, revenue sharing and profit sharing. We show that, in the independent pricing scheme, the seller can achieve the same profit using both channels as using only the direct channel. In the revenue sharing scheme, however, the seller’s channel strategy depends on consumers’ sensitivities on the cross-channel differences in both price and quality. Finally, the quality inefficiency in the second scheme can be eliminated in a profit sharing scheme. We then study the scenario in which consumers are heterogeneous with privately observed sensitivities, and show that it is always optimal to offer a single price-quality plan when both sensitive and insensitive consumers co-exist.