Democracy in product design: Consumer participation and differentiation strategies

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 differentiator.