Probabilistic selling in a distribution channel with vertically differentiated products

Abstract

Probabilistic selling with vertically differentiated products has witnessed strong growth and receives increasing attention. We investigate probabilistic selling in a distribution channel, where an online retailer allows a manufacturer to sell two vertically differentiated products to consumers as a marketplace and decides whether to generate the probabilistic product. We show that probabilistic product is available only when two necessary conditions are satisfied. One condition is that salient thinkers exist in the market, who consider the probabilistic product with less price sensitivity than rational consumers. Another condition is that the probabilistic product must come from two vertically differentiated products with sufficient quality differentiation. If probabilistic selling is used, it realizes price discrimination as a positive effect yet induces cannibalization as a negative effect. Furthermore, we recommend that the online retailer, acting as the more powerful player, should employ a revenue sharing contract to improve the performance of the total distribution channel.

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