Selling Co‐Products through a Distributor: The Impact on Product Line Design
2019
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
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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 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.
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