Probabilistic selling and manufacturer encroachment in retail markets with vertical‐differentiated products

Abstract This study investigates the adoption of a probabilistic selling strategy in a vertical‐differentiated marketing channel. We build a styled model in a retail market in which a manufacturer sells two vertical‐differentiated products solely through a retailer, and the manufacturer can encroach on the end market by selling probabilistic products or continue to sell them through the retailer. Our findings indicate that the manufacturer can benefit from the probabilistic selling strategy only when the expenditure of building the direct‐selling channel is low, but the retailer is always worse off. Furthermore, when the quality of the low‐end product is relatively low, the manufacturer prefers to choose the traditional selling format. Finally, the consumer surplus is higher when the retailer adopts the probabilistic selling strategy.