Abstract: When product quality and product quantity (ordering quantity) are endogenous, how to achieve the quality-quantity coordination becomes an important question in supply chain management. Further, given that low-quality products usually cause harm to consumers and product liability regulations often require the manufacturer to compensate for consumers' losses, there arises another question of how product liability affects the quality-quantity coordination mechanism for supply chain members. Finally, if the focal firm in a supply chain is equipped with a corporate social responsibility (CSR) preference on consumer surplus, then how does the CSR preference affect the quality-quantity coordination?
Focusing on these three questions, a two-stage game model is built to describe the operations of a supply chain where an upstream manufacturer and a downstream retailer conduct their product transaction via a wholesale price contract. In this model, it is assumed that the product is an experience good and may be in two different ex ante (before sales) quality states:high and low. The true quality level can not be observed by the consumers before sales, but after sales the consumers can learn. A low-quality product may cause harm to consumers. If the quality state is ex post (after sales) realized as low, the manufacturer chooses to recall (and remedy) the low-quality product or compensate for the consumers' losses according to some product liability regulations. On the other hand, the manufacturer can also choose to improve the quality level ex ante to reduce the probability for the low quality state to occur. Finally, it is assumed that the manufacturer, as the focal firm, is equipped with a CSR preference which is represented by the degree to which the manufacturer cares about consumer surplus. The decision sequence is as follows. Firstly, the manufacturer decides its product quality level and offers a wholesale price contract to the retailer. Secondly, the retailer decides its ordering quantity. Finally, the retailer sells the product to consumers in the final market.
With this model, how the product liability, the CSR preference and the quality improvement efficiency affect the manufacturer's product quality choice, the contract relationship between the manufacturer and the retailer, the supply chain members' profitability and the consumer surplus are investigated. A quality-quantity coordination contract is also developed and the impacts of the product liability and the CSR preference on the quality-quantity coordination contract are discussed.
The main results are as follows. (1) Product liability does not affect the manufacturer's quality choice, the ordering quantity, the supply chain members' economic profits and the consumer surplus, but raises the wholesale price. (2) A higher level of the manufacturer's CSR preference leads to a higher level of product quality, a higher ordering quantity, a higher economic profit for the retailer and a higher level of consumer surplus, but a lower economic profit for the manufacturer. (3) The quality improvement efficiency helps to enhance the product quality level, the ordering quantity, the retailer's economic profit, the supply chain total economic profit and the consumer surplus. (4) A proper combination of a quality improvement cost sharing contract and a quantity discount contract can effectively coordinate the operations of the supply chain. (5) Product liability raises the quantity discount, but decreases the retailer's share of the quality-improvement cost; on the other hand, the degree of the manufacturer's CSR preference has a negative impact on the quantity discount, but has no impact on the retailer's share of the quality-improvement cost.
In this research, firstly, a theoretical rationale is furnished to understand the effects of product liability, the manufacturer' CSR preference and the quality improvement efficiency on the product quality decision, the product-transacting contract and the corresponding supply chain members' profitability. Secondly, the quality-quantity coordination contract provides a benchmark to coordinate supply chains operated under different product liabilities. Finally, the theoretical rationale and the coordination contract framework can provide practitioners with useful insight to deal with product-harm crises.

Key words: supply chain, product quality, product liability, corporate social responsibility