Abstract: Based on the opportunity cost of upstream members and consumers' heterogeneous preference in quality, the optimal product strategy in quality and quantity for both the centralized and decentralized supply chain is explored. The decentralized supply chain consists of a retailer and a manufacturer (supplier), and the sequence of game between these two supply chain members is as follows:First, the retailer proposes a quality level for the supply chain product; then the manufacturer (supplier) determines the product's wholesale price charged to the retailer; third the retailer decides the order quantity under the wholesale price; the product strategy in quality and quantity and the wholesale price will be written in the contract developed for two parties if the negotiation between members succeeds; finally, the manufacturer (supplier) organizes the production activity as the product strategy described in the contract. An optimization model and a game model for the centralized and decentralized supply chain problems are formulated respectively, and the optimal solution and Nash equilibrium solution are obtained. Further, the impact of the consumers' heterogeneous preference in quality and opportunity cost of upstream members on supply chain product strategy, supply chain's profit and consumers' surplus are discussed through sensitivity analysis and numerical examples. Our analysis illustrates some management insights:(1) when the average consumers' preference level in quality is high, the supply chain should take a product strategy with high quantity and high quality and high price; (2) the supply chain product strategy should be to more focus on the public demand when the marginal cost of quality is low; whereas the supply chain only needs to consider the high-end demand with higher quality sensitivity and higher willingness to pay when the consumers' preference in quality is greatly heterogeneous and the marginal cost of quality is high; (3) The product should be considered to exit from the market with low average consumers' preference level in quality, high marginal cost of quality and homogeneous customers' preference in quality since both the supply chain performance and consumers' surplus are very low for this case; (4) the balance of power distribution among channel members is critical to obtain a higher supply chain's profit and social welfare; whereas it is key for the downstream retailer to achieve a stronger power in supply chain decisions if the supply chain strategy is to focus on consumers' cultivation and improve the product quality. Finally, in our research framework, the first mover advantage in the profit sharing is identified.

Key words: supply chain management, consumers' preference, opportunity cost, product strategy, Stackelberg game