Service quality, outsourcing and upward channel decentralization

We build a model to analyse the benefit of upward channel decentralization for a firm choosing service outsourcing and integration. The key findings of this paper are as follows. First, we formulate an upward channel decentralization problem as a game incorporating consumer behaviour of willingness to pay in a channel duopoly. Our model considers (i) service quality, (ii) consumer marginal willingness to pay (MWTP), and (iii) consumer perceivable difference. A supply chain firm’s preference of outsourcing strategy depends on the monotonicity of both the failure rate (or Mills Ratio) and CDF-PDF ratio of MWTP distribution function. Second, we use this model to explore the benefit of retailer strategy of upward channel decentralization. An equilibrium can be achieved by benefiting the low-label product with low quality service but deteriorating the high-label channel product with high quality.

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