Democracy in product design Consumer participatio

Authors: Zsolt Katona

Publish Date: 2015/12/16

Volume: 13, Issue: 4, Pages: 359-394

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Abstract

An increasing number of firms use social media to allow their customers to vote on new product designs This paper studies the implications of employing such a democratic product design DPD A linear city model is used with random locations to capture uncertainty about consumer preferences and to study strategic forces in monopoly and duopoly settings The results indicate that a monopolist will use market research to resolve the demand uncertainty unless DPD provides a cost advantage In a duopoly an asymmetric equilibrium emerges with exactly one firm using DPD Commitment to following consumer votes proves to be a strategic advantage therefore at least one firm promises not to deviate from the product design consumers voted for A subtle way to influence the outcome of the vote for firms is to generate product candidates instead of soliciting ideas from consumers Employing such a tactic allows firms to differentiate and they will be more likely to use DPD Finally the paper studies the level of consumer engagement in DPD and shows that a monopolist always benefits from a higher positive engagement and is hurt by negative engagement although to a lesser extent The results are reversed for a duopolist as negative sentiments can serve as an additional differentiatorWe need to determine the firm’s profits in three cases i When it does not use market research or DPD ii when it uses traditional market research iii when it uses DPD We already covered the first case and derived results for π N q in see Eq 3 When the firm uses traditional market research its profit is simply pi M=vfrac t16 as there is no uncertainty and the firm locates in the middle of the relevant interval Finally when the monopolist uses DPD its profits are E π D = v−t EmaxX w 1/2−X w 2 which does not depend on q and is between vfrac t4 and vfrac t16 4 It is clear from the above that π M maxπ N qE π D for any 0q≤1/2 proving part 1 For part 2 note that π N q is continuous and decreasing between q=0 and q=1/2 from E π N 0 = v−t/16 to E π N 1/2 = v−t/4 Furthermore it is easy to see that E π D ≤v−t/16 with an equation iff the DPD is perfect ie X w ≡1/4 Thus there exists a 0overline q1/2 such that Epi Noverline q=Epi D which satisfies part 2 of the proposition □Second when both firms decide to use traditional market research we simply end up with the D’Aspremont et al 1979 model in 01/2 or 1/21 with equilibrium profits of pi MM=pi NN0=frac 3t16 Examining the profit levels reveals that π M M π M N q∗ and π M M π M N q∗∗ therefore the best response to M cannot be N eitherThird to determine π M D and π D M the case when one firm uses traditional market research and its competitor uses DPD we can simply apply Lemma 2 at q=0 Since market research gives perfect information about demand the case when one firm uses market research and its competitor applies DPD is equivalent to the case in which one firm does not use any market research its competitor uses DPD but there is no uncertainty Therefore π M D = π N D 0 and π D M = π D N 0In order to determine the equilibrium choice of market research and DPD we first show that π D N qπ N N q Comparing the formulas obtained in the proofs of Lemmas 1 and 2 confirms this when a P L2 process is used Furthermore making the same calculation for the perfect DPD process σ f =0 reveals that the same holds Since profits change continuously as σ f increases we can conclude that the inequality holds when σ f is smaller than a positive threshold overline sigma Numerical calculations suggest that this threshold is the same as overline sigma in Lemma 2 For example a P L2 process results in r 20=frac 7sqrt 73/184 approx 1247 when the demand is certainly leftsided and r 21/2= frac 6sqrt 55/184 approx 1063 when a left or rightsided demand is equally likely Corresponding firm payoffs are pi DN 10=frac t31104267121655sqrt 146approx 0215t pi ND 20=frac t31104936+73sqrt 146approx 0058t pi DN 11/2=frac t31104267121673sqrt 110approx 0295t pi ND 21/2=frac t31104936+55sqrt 110approx 0049t

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