This paper studies the impact of retailer dominance on the product line design in a distribution channel. We revisit the elegant framework proposed by Villas-Boas (1998) in which a manufacturer sells his products through an independent retailer to heterogeneous consumers. We show that retailer dominance may completely eliminate the possibility of product line offering, irrespective of whether retailer dominance takes the form of price leadership or quality leadership. In addition, when consumers are sufficiently heterogeneous, product line offering may benefit the manufacturer without sacrificing the retailer’s profit, thereby creating Pareto improvement along the distribution channel. Given this Pareto improvement, retailer dominance may lead to an upward-distorted quality and the possibility of product line extension compared with either the integrated channel or the case with a weak retailer. Retailer competition does not necessarily restore the incen-tive to offer the product line, but may generate either quality degradation or quality enhancement. Our analysis establishes a threshold policy on the consumer composition for the retailer to pursue the price or quality leadership.

ABSTRACT
 INTRODUCTION
 LITERATURE REVIEW
 THE MODEL
  Channel structure and production technology
  Consumer segments
  Product line design
  Timing and transactions.
 ANALYSIS
  Retailer’s selling price decisions
  Manufacturer’s quality decisions
 EXTENSIONS
  Retailer’s quality design
  Competition at the manufacturer level
  Competition at the retailer level
 CONCLUSIONS
 REFERENCES

• Lu Hsiao(National Chung Hsing University, Taiwan (R.O.C.))
• Ying-Ju Chen(Hong Kong University of Science and Technology, Hong Kong)