Abstract: Few researches take both the product quality signal transfer of the manufacturer and the selling effort adjustment of the retailer into consideration in existing literature. So this paper, a two-echelon supply chain is considered in which the retailer's selling effort can change the market demand leading to the manufacturer bearing a certain scale of the selling effort. The manufacturer decides whether to invest in improving product quality and both parties hold prior beliefs about the manufacturer's type in case of investment. The retailer revises his belief according to the selling contract offered by the manufacturer, and then decides his selling price and selling effort. Quality investment decision, selling effort decision, pricing decision and the determination of cost allocation proportion of the players are analyzed by proposing the game model. It is shown that the manufacturer invests in product can lead to Pareto optimal when the investment is costless. In order to incentive the retailer's optimal selling effort, the manufacturer will stipulate a certain scale of the selling effort and penalty in the contract. However, in order to avoid the retailer from telling the lie, the retailer has to bear a smaller scale of selling effort than the optimal scale. Furthermore, higher scale of selling effort the manufacturer bears is not always helpful for the retailer, which means that scale over a certain range will hurt the retailer.

Key words: asymmetric information, quality investment, selling effort, signaling game