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Role of demand-side strategy in quality competition

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  • Ye, Guangliang
  • Mukhopadhyay, Samar K.

Abstract

The research questions studied in this paper concern the role of demand side strategy for a firm engaged in duopolistic competition in quality and price. A demand side strategy research looks towards markets and consumers unlike the traditional resource side strategy research that looks upstream — into the firm’s resources and its supply side. We examine whether following a demand side strategy would benefit the firm, the consumers or both. In a market where two firms are competing with each other, we first find the equilibrium quality and price levels for the traditional case where the two firms optimize their own profit function. We use this case as a benchmark case for comparison. Next, we let one firm (the lower quality firm) adopt a demand side strategy operationalized by an objective function where the profit is augmented by consumer surplus. The equilibrium results show that a demand side strategy would increase the product quality level in the market, and improve the adopter firm’s competitiveness at the same time increasing the market consumer surplus. We also study the case where the higher quality firm adopts demand side strategy and compare the results with the two cases mentioned above. Overall, we find that adopting a demand side strategy would benefit the adopter firm’s profitability and the consumers. We, therefore, find evidence of what the strategy literature has been predicting about the role of demand side strategy.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Production Economics.

Volume (Year): 145 (2013)
Issue (Month): 2 ()
Pages: 696-701

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Handle: RePEc:eee:proeco:v:145:y:2013:i:2:p:696-701

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Web page: http://www.elsevier.com/locate/ijpe

Related research

Keywords: Demand side strategy; Quality competition; Duopoly; Consumer surplus;

References

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  1. Charles H. Fine, 1986. "Quality Improvement and Learning in Productive Systems," Management Science, INFORMS, vol. 32(10), pages 1301-1315, October.
  2. Mukhopadhyay, Samar K. & Setaputra, Robert, 2007. "A dynamic model for optimal design quality and return policies," European Journal of Operational Research, Elsevier, vol. 180(3), pages 1144-1154, August.
  3. Yasemin Y. Kor & Joseph T. Mahoney & Steven C. Michael, 2007. "Resources, Capabilities and Entrepreneurial Perceptions," Journal of Management Studies, Wiley Blackwell, vol. 44(7), pages 1187-1212, November.
  4. Choi, Chong Ju & Shin, Hyun Song, 1992. "A Comment on a Model of Vertical Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 229-31, June.
  5. Olivier Chatain & Peter Zemsky, 2007. "The Horizontal Scope of the Firm: Organizational Tradeoffs vs. Buyer-Supplier Relationships," Management Science, INFORMS, vol. 53(4), pages 550-565, April.
  6. Arora, Ashish & Gambardella, Alfonso & Magazzini, Laura & Pammolli, Fabio, 2007. "A Breath of Fresh Air? Firm types, scale, scope and selection effects in drug development," MPRA Paper 16042, University Library of Munich, Germany.
  7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  8. Ivo Zander & Udo Zander, 2005. "The Inside Track: On the Important (But Neglected) Role of Customers in the Resource-Based View of Strategy and Firm Growth," Journal of Management Studies, Wiley Blackwell, vol. 42(8), pages 1519-1548, December.
  9. Mukhopadhyay, Samar K. & Ma, Huafan, 2009. "Joint procurement and production decisions in remanufacturing under quality and demand uncertainty," International Journal of Production Economics, Elsevier, vol. 120(1), pages 5-17, July.
  10. Ron Adner & Daniel Levinthal, 2001. "Demand Heterogeneity and Technology Evolution: Implications for Product and Process Innovation," Management Science, INFORMS, vol. 47(5), pages 611-628, May.
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