UC Irvine

© 2015. Demand-enhancing services like automated help desks, toll-free technical support hotlines or delivery and installation services are routinely offered to consumers by manufacturers or retailers or both. This paper examines how the identity of the channel member (manufacturer or retailer) providing the demand-enhancing services can have a different impact on the manufacturer's product quality decisions and resultant channel and consumer welfare. We show that when a manufacturer wishing to sell its entire product line through a retailer provides demand-enhancing services to consumers, then it chooses higher product quality levels and channel member profits and consumer welfare are higher. However, when the retailer selling the manufacturer's product line is the one who provides the demand-enhancing services, then the manufacturer may choose a lower product quality level and retailer profit and consumer welfare may be lower. Our results therefore indicate that a manufacturer should not simply look at cost savings arising from shifting service responsibilities from itself to the retailer. Similarly, a retailer should not expect to always benefit from situations where it has secured the ability to choose its own desired levels of services to be provided to consumers.