Many manufacturers sell products through both the e‐retail and direct channels, which may lead to channel conflicts. To alleviate this, quality differentiation becomes an important marketing strategy for the manufacturer. However, few studies investigate how the form of the e‐tailer's selling contract affects the manufacturer's distribution strategy. Here, we investigate this by establishing a game model in which a manufacturer sells two products with similar functions, but different quality levels, through the direct channel and an e‐tailer. The manufacturer may distribute high‐ and low‐quality products through the direct and e‐tailer channels, respectively, or vice versa. The e‐tailer can choose either the reselling or agency selling contracts. We find that the impact of quality differentiation on equilibria depends on the distribution strategy, contract form, and level of product competition. Under the reselling contract, the manufacturer (he) should distribute high‐quality products directly if the relative efficiency of low‐ to high‐quality products is low. Under the agency selling contract, he should distribute low‐quality products directly if the relative efficiency is moderate. Finally, the e‐tailer (she) should choose the agency selling contract if the production cost is moderate, regardless of the manufacturer's distribution strategy.

With the development of Internet technology, many manufacturers encroach into the retail market by selling products directly to consumers, which is called manufacturer encroachment. In practice, the manufacturer may encroach in normal sales period, markdown period, or both periods in a two‐period supply chain. It is a challenging task for the firm manager to provide appropriate quality level under different channel structures. This research originally studies manufacturer encroachment with endogenous quality investment decision in a two‐period supply chain considering that consumers' valuation of products depreciates over time. Using a game‐theoretic framework, this work explores four channel strategies of the manufacturer and discusses equilibrium decisions and profits. The analysis generates several insights. First, the manufacturer should promote quality investment if encroachment occurs when the direct selling is efficient. Second, regardless of which period and scenario, encroachment may increase wholesale price when the direct selling cost is smaller than a threshold. Third, results show the effect of encroachment time on price could be classified into quality investment effect, wholesale price effect, and channel‐adding effect. The quality investment effect increases retail price, while the channel‐adding effect and wholesale price effect decrease retail price. Finally, results reveal that encroachment is always the best choice for the manufacturer and it does not always harm the retailer's profits. Overall, our results and managerial insights can help the manufacturer to formulate channel strategies, wholesale price, and selling quantity decisions while help the retailer to make order quantity decision.